PRINCETON, NJ – New Jersey hospitals could lose $97 million in federal funds next year and more than $500 million over the next five years under new Medicare payment rules proposed to take effect in October, according to an analysis by the New Jersey Hospital Association.

The NJHA's Health Economics department examined the impact of three provisions under the Centers for Medicare and Medicaid Services' 2010 inpatient prospective payment proposed rule, which sets Medicare payment policies.

The proposed rule was released May 1 and is slated to be finalized Aug. 1. It would take effect Oct. 1, the start of the federal fiscal year.

"This is more devastating financial news for hospitals in our state," said NJHA President and CEO Betsy Ryan. "New Jersey already has seen nine hospitals close in the last two years, and more will surely follow if we continue to chop away at the payments they receive for taking care of patients."

The proposed rule makes several changes, including two so-called "behavioral offsets" which reduce payments to hospitals to adjust for variables in coding and classification of claims, and another that would eliminate capital funds distributed under the graduate medical education (GME) system.

The GME program provides funding to teaching hospitals to help cover the added costs of training new physicians.

The NJHA analyzed the impact each provision would have on the state's hospitals.

Under the "operating behavioral offset," New Jersey hospitals would see their annual "market basket" adjustment cut from 2.1 percent to 0.2 percent. This change would equal a $77 million loss for New Jersey hospitals next year and a total of $409 million over the next five years.

The "capital behavioral offset" would be reduced from an anticipated increase of 1.2 percent to a cut of 0.7 percent. The impact would be a $6.1 million loss statewide next year and $31 million over the next five years.
Existing capital IME funding would be eliminated entirely under the proposed rule, a loss of $14 million next year and $71 million over the next five years.

"Medicare reimbursement rules can be very complicated but the potential impact is simple and sobering," said Sean Hopkins, NJHA's senior vice president of health economics. "Cuts of this depth mean that hospital services and hospital jobs are in jeopardy."

The proposed rule contains yet another worrisome provision for New Jersey hospitals – one that could mean financial gains for some hospitals and losses for others. The provision, called the imputed wage index floor, gives New Jersey hospitals a minimum reimbursement level for treating Medicare patients.

The federal government established this floor in 2005 to compensate for the high labor costs in the region and to put New Jersey hospitals on equal terms with hospitals in other states, where a rural floor ensures their reimbursements do not fall below a certain level.

Current law, however, calls for this floor to expire in 2011. It also requires any changes in hospitals' payments to be budget-neutral on a statewide basis – meaning that if one hospital sees its payments increase, other hospitals would sustain cuts of the same amount.

As much as $44 million in Medicare funds could be vulnerable to this shift next year.