MedPAC in no rush to recommend major hospital Medicare payment increases despite industry's pleas

The Medicare Payment Advisory Commission's recent breakdown of the hospital sector’s financial viability largely struck a different tone from the doom and gloom industry groups have voiced as of late.

The independent commission advises Congress on year-to-year Medicare policy adjustments, which are largely based on data from 2020 and 2021, preliminary data for 2022 and trend projections for upcoming years. It released its annual report to Congress last week.

With the exception of additional support for safety-net providers—which industry group America’s Essential Hospitals (AEH) has already criticized for “overlooking” uncompensated care delivered to non-Medicare patients—the group largely told Congress that most hospitals will manage their finances and recommended that lawmakers stay the course with 2024’s inpatient prospective payment system (IPPS) and outpatient prospective payment system (OPPS) rules.

“The Commission anticipates that a 2024 update to hospital payment rates of current law plus 1% would generally be adequate to maintain FFS beneficiaries’ access to hospital inpatient and outpatient care and keep IPPS and OPPS payment rates close to the cost of delivering high-quality care efficiently,” the group wrote in its report (PDF).

In an accompanying letter to Congress, MedPAC Chair Michael Chernew, Ph.D., said “the Commission is acutely aware of how providers’ financial status and patterns of Medicare spending varied in 2020 and 2021 from historical trends, as well as the higher and more volatile increases in input costs for several health care sectors that occurred during 2022.”

State and national hospital groups spent much of 2022 highlighting spikes in labor costs and other expenses that combined with slow-to-recover volumes for a year of negative median operating margins.

MedPAC acknowledged that 2022 input cost increases for hospitals “were higher and more volatile than they have been in recent years.” However, its 2021 data set suggested that “most indicators of hospital payment adequacy remained positive or improved.”

These included inpatient hospitals’ roughly 8% marginal profit on IPPS and OPPS services, “which is similar to pre-pandemic levels,” and a “record high” 8.7% all-payer operating margin, MedPAC wrote. The latter came despite a decrease in federal relief funds from 2020’s $35 billion to 2021’s $18 billion.

“In other words, the federal relief funds that hospitals received in 2021 more than offset the additional coronavirus pandemic-related expenses that were not covered by the higher patient revenues associated with COVID-19,” MedPAC wrote in the report. “Rather, the increase in the operating margin of over 3 percentage points resulted from hospitals’ operating revenues growing more than their costs.”

The commission noted there was “significant variation” within the aggregate all-payer operating margin for 2021 from 0.8% to 14.9% among the middle half of IPPS hospitals. Those on the lower end tended to be those in rural areas that would also have benefited from the government’s targeted rural hospital relief funds.

Nine-month 2022 earnings from large health systems used as a proxy for 2022 trends showed 2% to 4% operating margin declines among nonprofits Ascension and Trinity Health, 2% to 4% increases among for-profits HCA Healthcare and Tenet Health and performance comparable to 2019 at Community Health Systems, MedPAC wrote.

“Preliminary 2022 all-payer operating margin data were mixed relative to pre-pandemic levels, but hospitals continued to have strong access to bond markets,” the commission wrote.

Looking ahead, the group projected hospitals’ Medicare margins would decline relative to 2021 by roughly -10%, similar to 2017, and that “relatively efficient” hospitals will have 2023 Medicare margins “modestly below break-even, near pre-pandemic levels.”

Taken together, MedPAC’s recommended a modest update to general acute care hospitals’ base payment rates in the coming year with plans to keep an eye on how providers’ economic headwinds continue to progress.

“If current projections of input inflation and hospital costs turn out to be inaccurate, these discrepancies will be accounted for in our assessment of payment adequacy in our next recommendation cycle,” the commission wrote.

The exception to the recommendation was Medicare safety-net hospitals with a poor payer mix, for which the update “may not be sufficient.”

For these, MedPAC gave an additional recommendation that Medicare makes a targeted add-on payment to these safety-net providers. Further, current payments to safety-net hospitals should be redistributed through its Medicare Safety-Net Index (MSNI), which would boost payouts to most safety-net facilities, the commission wrote.

In a statement, AEH Senior Vice President of Policy and Advocacy Beth Feldpush said MedPAC’s push for targeted support was appreciated but that the MSNI “could have the perverse effect of shifting resources” from large, teaching and urban hospitals that also care for low-income and uninsured patients.

“The MSNI methodology fails to account for all the nation’s safety net hospitals by overlooking uncompensated care and care provided to non-Medicare, low-income patients—especially Medicaid beneficiaries,” Feldpush said. “Any practical definition of a safety net provider must consider the care of Medicaid and uninsured patients, yet the MSNI misses on both counts.”