MedPAC starts to scrutinize the costs of outpatient coinsurance at critical access hospitals  

At the nation’s nearly 1,400 critical access hospitals (CAHs), cost-sharing payments incurred by Medicare beneficiaries for outpatient services are onerous enough that a new methodology warrants consideration, according to a recent policy discussion.

The Medicare Payment Advisory Commission (MedPAC) examined the issue at its September meeting, reporting that beneficiary coinsurance for CAH outpatient care equates to significant dollar amounts. Because the 20% coinsurance rate for CAH care is applied to listed charges, the required contribution is substantially higher than when based on Medicare’s administratively set payment amounts for prospective payment system (PPS) hospitals.

Another key difference is that PPS hospitals are subject to a cap on coinsurance for outpatient services, which in 2024 is $1,632. Each year’s cap amount is equal to the deductible for inpatient care to ensure patients don’t have a monetary incentive to choose the inpatient setting when the same care can be delivered on an outpatient basis.

The lack of a cap for CAH outpatient care essentially means the coinsurance amount is 20% of the chargemaster rate. The coinsurance rate becomes more problematic as higher-cost services such as joint replacements take place in CAHs more frequently, according to the presentation.

In 2022, the 1.9 million beneficiaries using outpatient CAH services paid $3.3 billion in coinsurance either out of pocket or through supplemental insurers, per data shared in a slide deck. Meanwhile, Medicare program payments for those services amounted to $3.2 billion. The average coinsurance payment was $1,750 and varied significantly depending on the extent to which the hospital marked up its charges relative to costs.

The payments do not constitute an out-of-pocket burden for most rural fee-for-service (FFS) beneficiaries, with 84% having Medigap or other secondary insurance, according to the presentation. However, premiums for those policies rise in correlation with the payments made by supplemental insurers.

A balancing act

The cost-based reimbursement structure provided the average CAH with $4 million more per year than it would have received with PPS rates when looking at Medicare FFS patients in 2022, according to presented data. That difference likely would be significantly greater when factoring in Medicare Advantage (MA) payments. In comparison, the average all-payer profit for a CAH was between $1 million and $2 million.

One inference is that CAHs would face financial jeopardy if they instead received the standardized rate as part of an effort to address coinsurance concerns. That’s especially true when considering that Medicare FFS outpatient revenue comprised 13% of total revenue at CAHs in 2022, compared with 6% at PPS hospitals.

“Medicare, and Medicare-focused outpatient business in particular, tends to be more important in rural areas,” said Jeffrey Stensland, PhD, a MedPAC policy analyst.

Thus, the policy focus should be on modifying the coinsurance rules rather than changing the CAH payment system, several commissioners said.

“I’m very sensitive to ensuring that any changes we make don’t contribute to CAHs exiting the market,” said Betty Rambur, PhD, RN, professor of nursing at the University of Rhode Island. “The nation depends on this infrastructure.”

Plausible changes

An alternative model, according to the presentation, would entail reducing cost-sharing to 20% of the payment amount rather than the service charge. In that scenario, coinsurance payments in 2022 would have been $2.1 billion lower. That estimate was based on an examination of claims to assess the difference if coinsurance payments were based on the estimated cost of service (determined by applying a cost-to-charge ratio), rather than charges.

Another possible step would be to implement the same type of cap that’s in place for outpatient coinsurance amounts at PPS hospitals.

The higher amounts being paid by Medicare to offset the resulting decrease and ensure total payments to CAHs remained steady would have raised MA benchmarks by $1.3 billion, for a total jump in program expenditures of roughly $3.2 billion, according to the analysis. That increase would have been shouldered by U.S. taxpayers (making up 75% of the deficit) and Part B beneficiaries (25%), with Part B premiums rising by $13 per person per year.

The hike in MA benchmarks stemming from the discussed policy changes merits further study. But several commissioners recommended delaying consideration of any such questions and moving quickly to design a straightforward solution to the coinsurance issue.

“I view this as a really egregious problem, and I would like to try and do something quicker than later,” said Michael Chernew, PhD, the MedPAC chair and a professor at Harvard Medical School. “There are a lot of potential unintended consequences, and we’re either going to have to decide to quantify them the best we can and take a stand or to wait and just see what we can do.”

Bigger changes

If and when the time comes for MedPAC to consider extensive changes to the CAH payment system, one approach would have facilities bill for services at the PPS rate and then receive additional reimbursement to cover costs, said Lynn Barr, a MedPAC commissioner and the founder of Caravan Health.

In that arrangement, they also would participate in Medicare’s quality programs. Any bonus received through that participation would not affect the MA benchmark, nor would the cost-based reimbursement add-on. Keeping such payments distinct from the MA program could tamp down incentives for plans to enroll rural Medicare beneficiaries and possibly guide them to other hospitals.

Barr sees a benefit to aligning CAH reimbursement more closely with the general Medicare payment system while also taking steps to guarantee the continued viability of those hospitals.

In her recommendation, “[CAHs] are billing. They are coding. We can use their claims data in a meaningful way to assess their performance, and they can participate in the quality programs.”

Although the commission’s focus likely will be on a quicker fix for the coinsurance issue, Barr asked whether it would be possible to also model her proposal “because of the benefits of modernizing the health system, giving them parity with everyone else, actually bringing their coinsurance to the same rate.”