Report by Medicare trustees describes a daunting payment picture for healthcare providers

• A new Medicare trustees report describes challenging financial scenarios that lie ahead for healthcare providers.
• Policies over the last decade have significantly decreased provider payments, and more cuts lie ahead without congressional action.
• Instead of focusing on further payment cuts to shore up Medicare finances, experts say, policies should look to encourage greater efficiency.

The trust fund that pays for hospital care of Medicare beneficiaries is on course to run out of money in 2026, and that assessment wasn’t the only concerning part for hospitals in a new government report.

The 2021 annual report by the Boards of Trustees for the Hospital Insurance (HI) Trust Fund and the Federal Supplementary Medical Insurance Trust Fund also notes the challenge of sustaining care delivery operations at current reimbursement levels.

The trustees’ simulations “collectively suggest a deterioration of facility margins for hospitals, skilled nursing facilities and home health agencies, particularly over the long run,” the report states.

In 2027, relative to 2019, the projections show 3% more hospitals experiencing negative total margins and 10% more facing negative Medicare margins. By 2040, roughly a third of hospitals would have negative total margins.

Why providers are in a tight spot

Hospital finances in recent years have been constrained by various Medicare payment policies, the trustees wrote. Examples are:

• An Affordable Care Act (ACA) provision that imposed a productivity adjustment on the annual Medicare market-basket payment increase
• Another ACA provision that altered the formula for determining Disproportionate Hospital Share (DSH) payments
• The 2% sequestration of Medicare payments, which was initiated in a 2011 law and has been frozen for much of the COVID-19 public health emergency — but is scheduled to resume in 2022 and run through 2031

The report’s look at the Medicare payment landscape doesn’t include a 4% decrease that is scheduled to be implemented in 2022 as a statutory adjustment stemming from passage of this year’s COVID-19 relief legislation. Provider advocates are lobbying Congress to nullify the cut.

“Such extreme cuts would have a long-lasting and devasting impact on patient care, which is unconscionable amid a public health crisis,” Chip Kahn, president and CEO of the Federation of American Hospitals, said in a letter to Congress.

Physicians could encounter a nearly 10% payment cut in 2022, with a statutory 3.6% reduction set to take effect in addition to the 6% in cuts facing hospitals.

Why Medicare APMs may become a more central focus

Given that fee-for-service price increases are below inflation under current policy, “The question is, can we develop payment models that encourage efficient care delivery and support the delivery system without increasing spending relative to where we are in current law,” said Michael Chernew, PhD, professor of healthcare policy and director of the Healthcare Markets and Regulation Lab at Harvard Medical School.

“While there are a lot of pricing improvements we can do in Medicare, in the big picture, Medicare has an efficiency problem, not a pricing problem,” Chernew said during an Aug. 31 webinar hosted by the Alliance for Health Policy (AHP). “And so finding a solution will require finding efficiencies.”

From a basic economics perspective, Chernew said, alternative payment models (APMs) can promote efficiency by giving providers more flexibility to change their use of inputs such as services and supplies.

He added, “Can we mix and match those inputs to reduce spending [and] get the same or even better outputs?”

Recent news about accountable care organizations may answer that question affirmatively. CMS reported that in 2020, the 513 participants in the Medicare Shared Savings Program generated a program-best $1.9 billion in net savings for Medicare while averaging 97.8 on a 100-point quality measurement scale.

The National Association of ACOs (NAACOS) says the aggregate performance shows the logic of enacting policies to encourage ACO participation. A bipartisan congressional bill, the Value in Health Care Act, would seek to do so by increasing shared savings rates, tweaking approaches to risk adjustment and benchmarking, and allowing for more time before participants take on risk.

NAACOS and other healthcare associations signed a letter to Congress in which they highlighted an independent analysis that found the bill would save $280 million over 10 years.

The practical upshot of fund depletion

Funded by payroll taxes, the HI Trust Fund is on pace to run out of assets in five years, according to the trustees’ report, despite a projected net gain in 2022 as providers reimburse Medicare for COVID-19 advance payments. Annual deficits will resume in 2023, according to the projection.

By 2026, revenues would cover only 91% of the fund’s outlays. That share would drop to 78% in 2045, and the gap would be greater if healthcare costs rise by more than is seen in the report’s relatively conservative projections.

Medicare policy experts have said providers should expect payment delays if the fund runs out of money.

“People could go to the doctor, but [for] the provider, it might take a little while because they have to wait for the payroll tax revenue to come in” to be paid, Cori Uccello, senior health fellow with the American Academy of Actuaries, said during another AHP webinar earlier this year.

Indirect impacts could be felt across the system of care, Uccello added. “Do people then face delays in getting care because providers are getting delayed in their payments?”