Hospitals warrant an extra boost in their Medicare payment rate next year, MedPAC says

Hospitals will get a more favorable Medicare payment increase in FY25 if Congress follows the recommendations of the Medicare Payment Advisory Commission (MedPAC).

In its semiannual report to Congress, MedPAC recommended a 1.5% bump on top of what otherwise would be provided according to statute. That would mean an estimated increase of about 4.5% for the sector.

Although such a raise would not cover the costs hospitals have sustained in an inflationary environment, it would be a bigger increase than was provided in recent years (e.g., a 3.1% increase for FY24). Neither the recommendation nor the metrics presented in the report reflect the issues stemming from the ongoing Change Healthcare outage.

Whether Congress and CMS agree to the recommendation is in question. The preliminary FY25 Medicare inpatient payment rate and accompanying policies are set to be published in April in a proposed rule for acute-care and long-term care hospitals.

Trends feeding tighter margins

High recent costs are the biggest reason for the recommendation. The report notes that for FY22, CMS projected a 2.7% input-cost increase, which fell well short of the actual 5.7% jump. A gap remained in FY23, with a 4.1% projection trailing a 4.8% actual increase (the productivity adjustment then took the actual payment updates down further).

FY22 also included the restoration of the 2% Medicare payment sequester and a $1.2 billion decline in uncompensated care (UC) payments, stemming in part from a drop in the projected uninsured rate. UC decreases have continued the past two years, and in 2023, enhanced payments for treating COVID-19 cases and using new COVID-19 technologies expired.

Between 2021 and 2022 (the most recent year for which complete data are available), hospitals’ aggregate all-payer operating margin fell by more than 6 percentage points due in large part to inflation and the expiration of COVID-19 relief funding. Preliminary data indicates operating margins continued to trail pre-pandemic levels in 2023.

Borrowing costs also increased the last couple of years, the report notes, although the growth was tempered when compared with the general market, “indicating continued investor demands for hospital bonds.” Investors reduced their risk premium for purchasing hospital bonds.

Although hospitals’ Medicare fee-for-service (FFS) margins fell to a record low of -11.6% in 2022, that’s expected to improve to -8% in FY24 when considering the $9 billion lump-sum remedy for past 340B underpayments. Without that payment, however, the margin would be -13%.

For-profit hospitals had notably higher margins compared with not-for-profit hospitals in 2022, in part because of a better ability to hold down labor costs.

Capacity concerns not widespread

Pointing to metrics showing 67% of beds were filled in 2022, MedPAC said capacity limitations do not appear to be a concern for Medicare hospitals. Analysts use capacity as a gauge of whether staffing and other resource levels are adequate.

Nonetheless, “anecdotal reports suggest that staffing shortages in 2023 led to some hospitals temporarily postponing some elective surgeries and reducing their inpatient capacity,” the report states.

In 2023, 18 acute-care hospitals closed, while 11 opened. There were only two closures that left patients in the market without a relatively close facility at which to seek care, according to the report.

However, more hospitals probably would have closed if not for the availability of the new rural emergency hospital designation, MedPAC said.

Overhauling DSH and UC payments

MedPAC recommends a policy change to Medicare disproportionate share hospital (DSH) and UC payments, saying such payments are not targeted effectively. The commission recommends implementation of a Medicare Safety-Net Index (MSNI), which would be more precisely based on a hospital’s share of low-income Medicare beneficiaries.

The commission first proposed the index last year. A hospital’s MSNI percentage would be an add-on to its Medicare FFS payment rate and also would apply to Medicare Advantage payments.

Components in the formula would include a hospital’s share of:

• Medicare patients who receive the Part D low-income subsidy
• Revenue spent on bad debt and charity care
• Overall volume associated with Medicare beneficiaries

The MSNI in its first year should receive a $4 billion increase over the allocation for DSH and UC payments, according to the commission.

“This recommendation would better target limited Medicare resources toward those hospitals that are key sources of care for low-income Medicare beneficiaries and are facing particularly significant financial challenges,” according to the report.