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Efficient hospitals operate on -2% margins in Medicare payments, MedPAC reports

MedPAC recommends removing the $1 billion in financial penalties hospitals incur each year under two incentive programs.

Susan Morse, Managing Editor

The Medicare Payment Advisory Commission is recommending that payments in 2020 to acute care hospitals increase by 2 percent instead of the 2.8 percent expected under current law, and that the remaining 0.8 percent be used as a financial reward under a single quality incentive program.

In also recommending that hospitals keep the money assessed in penalties from two quality incentive programs, MedPAC said overall Medicare payments to hospitals will be expected to increase above current law. Eliminating the penalty-only programs will remove about $1 billion in overall penalties that hospitals currently incur each year, MedPAC said.

MedPAC is recommending that all four current incentive programs be replaced by the single streamlined hospital value incentive program, or HVIP.

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Hospitals are currently losing money on Medicare payments.

Even the most efficient hospitals have a negative margin of -2 percent, according to MedPAC.

Margins are a negative 2 percent on a three-year rolling average for the estimated 291 hospitals considered efficient in operations, compared to another 1,800 hospitals. Last year margins were a negative 1 percent, MedPAC's Executive Director  Dr. James Mathews said Friday.

"Medicare margins in the hospital sector have been negative for some time now," Mathews said.

This means that to bring hospitals out of a negative margin on Medicare payments and to give them a 2 percent payment update would require at least a 4 percent adjustment. This update to all hospitals would be expensive to the program, Mathews said in releasing the commission's recommendations.


Medicare's current four quality programs include the Hospital Inpatient Quality Reporting Program, the Hospital Readmissions Reduction Program, the Hospital-Acquired Condition Reduction Program and the Hospital Value-Based Purchasing Program.

MedPAC recommends that Congress replace these four with the hospital value incentive program.

This would require a change in law, given current hospital quality improvement programs are statutory, Mathews said.

Since the commission first brought up the recommendation in its June 2018 report to Congress and MedPAC voted on this recommendation in January, Congress is aware of what commissioners want to see happen, Mathews said.

The designs of the current hospital quality payment programs are complex, in some instances duplicative, and send different performance signals to hospitals, MedPAC said.

The HVIP includes a small set of population-based outcome, patient experience and value measures; scores all hospitals based on the same absolute and prospectively set performance targets; and accounts for differences in patients' social risk factors by distributing payment adjustments through peer grouping.

The HVIP is simpler to administer, reduces provider burden and more equitably considers differences in providers' patient populations compared with existing programs, MedPAC said.


For calendar year 2020, Congress should increase the calendar year 2019 Medicare payment rates for physician and other health professional services by the amount specified in current law, MedPAC said.

Medicare payment rates to physicians are about 75 percent of the participating provider organization (PPO) rates, Mathews said.


In 2019, MA benchmarks, bids and payments averaged 107, 89 and 100 percent of fee-for-service spending, respectively, reflecting positive trends in the MA program, MedPAC said.

However, for several years, the commission has expressed concern that enrollees in MA plans have higher risk scores than similar beneficiaries in FFS Medicare because of plans' more intensive coding practices.

Those higher risk scores inflate Medicare's payments to plans by about 1 to 2 percent, MedPAC said. The commission previously recommended that CMS reduce excess payments stemming from plans' intensive coding practices.

The commission continues to have concerns with the MA star rating system, which serves as the basis for plan quality bonuses and public reporting of plan quality. MA star ratings continue to be determined at the contract level.

Also, large contract consolidations have clouded MA's ability and beneficiaries' ability to assess quality of care, MedPAC said. The commission has recommended curtailing the practice of MA plan consolidation to obtain unwarranted quality bonus payments.

Because contracts can cover wide and discontiguous geographic areas and quality results are often determined based on only a small sample of beneficiary medical records, Medicare and beneficiaries lack important information about the quality of care of MA plans in their market, MedPAC said.

As a result, it is difficult to compare quality among plans, and the MA star rating system continues to award unwarranted quality bonus payments, MedPAC said.

Medicare also continues to lack the information necessary to compare MA quality with the quality of care in FFS. The Centers for Medicare and Medicaid Services needs to do more to improve encounter data as the source of quality metrics in MA, MedPAC said.


In 2017, total Part D spending was nearly $94 billion, accounting for about 13 percent of Medicare spending. Plan enrollees paid $14 billion of that amount in plan premiums and additional amounts in cost sharing.

Generic drugs now account for nearly 90 percent of the prescriptions filled, and enrollees' average premiums for basic benefits have remained steady for many years, around $30 per month.

However, changes to Part D's benefit design, in combination with growth in the use of high-cost medicines, may be eroding plans' incentives to manage benefit costs, MedPAC said.

Over time, a growing share of Medicare's payments to plans have taken the form of cost-based reinsurance instead of fixed-dollar payments, which provide incentives to control spending.

Reinsurance is by far the fastest growing component of Medicare Part D, MedPAC said. This is the reconciliation payments made to plans to compensate for high-cost enrollees. Here, Medicare is paying 80 percent of those costs.

Plans don't have the financial incentives to negotiate with drug manufacturers if they have some expectation that Medicare will make them whole, Mathews said.

Between 2007 and 2017, reinsurance payments increased at an average annual rate of nearly 17 percent, while Medicare's fixed-dollar direct subsidy payments decreased nearly 2 percent per year.

In addition, beginning in 2019, brand-drug manufacturers are required to provide a 70 percent discount in the coverage gap, an increase from 50 percent, decreasing plan sponsors' responsibility. This change further weakens sponsors' incentives to manage spending, MedPAC said.

Measures to increase the financial risk that plans bear, such as those recommended by the commission in 2016, are essential to ensure plans have incentives to use their new management tools to reduce spending growth for Medicare and its beneficiaries, MedPAC said.


As mandated by Congress, MedPAC reports on incentives for prescribing opioid and non-opioid pain treatment under Medicare's hospital inpatient and outpatient payment systems.

Medicare uses bundled payments to pay for pain management drugs and services in both the inpatient and outpatient settings. The IPPS and OPPS payment bundles create a financial incentive for hospitals to be cost conscious when purchasing items and services.

The commission analyzed certain list prices for opioids and non-opioid alternatives commonly used in the hospital setting and found that both opioids and non-opioids are available at a range of prices, and there are expensive and inexpensive options for both.

The commission concludes that there is no clear indication that Medicare's IPPS or OPPS discriminates against non-opioids.

The study is not intended to be an assessment of the clinical appropriateness of the use of opioids versus non-opioid alternatives, and the commission recognizes that clinicians' decisions about which pain management drug to prescribe are based on a multitude of patient-specific factors.

CMS monitors opioid use through tracking programs in Part D, but Medicare does not operate similar tracking programs in Part A or Part B. Policymakers may wish to direct CMS to track opioid use in the hospital inpatient and outpatient settings, MedPAC said.


The Medicare Payment Advisory Commission, a congressional nonpartisan agency, is required by law to annually review Medicare payment policies and make recommendations to Congress.

In its latest report released today, MedPAC makes payment policy recommendations for nine provider sectors in fee-for-service Medicare and reviews the status of Medicare Advantage and Medicare's prescription drug benefit Part D.

Twitter: @SusanJMorse
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