MedPAC says 2023 hospital payments shouldn’t increase in response to COVID-19

• CMS shouldn’t increase Medicare payments to hospitals next year beyond the statutory annual update, according to the Medicare Payment Advisory Commission’s yearly report.
• Metrics indicate that Medicare payments to hospitals are adequate and that Provider Relief Fund disbursements have helped providers shore up their finances during the public health emergency, MedPAC says.
• Some MedPAC members say issues with labor and supply costs bear close watching in future rate-setting policy.

If recommendations from the Medicare Payment and Advisory Commission (MedPAC) in its annual report to Congress are any indication, hospitals and health systems shouldn’t expect a payment bump to compensate for the financial turmoil of the past two years.

The increase to inpatient and outpatient prospective payments in 2023 should be limited to the statutory change, according to the report. That change is projected to be 2.5% for inpatient payments and 2% for outpatient payments, although the updates could change based on wage data and other metrics that affect the hospital market basket.

“The Commission anticipates that this recommendation will be enough to maintain beneficiaries’ access to hospital inpatient and outpatient care and keep payment rates close to the cost of delivering high-quality care efficiently,” the report states.

Higher wage rates and supply costs are a notable byproduct of the pandemic, but MedPAC recommends that such increases be accounted for in annual market-basket updates.

“To the extent that the effects of the PHE [public health emergency] are temporary changes — even across multiple years — or vary significantly across individual hospitals, they are best addressed through targeted temporary funding policies rather than a permanent change to all hospitals’ payment rates in 2023 and future years,” the report states.

Data suggest current payments are sufficient

Even though the data used to generate the recommendations were from 2020 — an obvious outlier in many respects — MedPAC says the underlying metrics are valid indicators of payment adequacy.

MedPAC says its data reflect that beneficiaries maintained adequate access to care, with fewer hospitals closing and inpatient capacity staying at surplus levels. Noting a Medicare marginal profit of about 5%, the report states that hospitals “continued to have financial incentives to provide inpatient and outpatient services to Medicare beneficiaries.”

Medicare margin “improved slightly in 2020, indicating that the federal relief funds did their intended job,” the report states. Specifically, margin ticked up from -8.7% in 2019 to -8.5% when including the relief funds but dropped to -12.6% without the funds.

Among hospitals receiving inpatient prospective payments, all-payer total margin was 6.3%, which MedPAC said was similar to the average of the 15 previous years. Margin reached a “near record high for rural hospitals, reflecting targeted federal relief funds,” according to the report, while some large systems reported that margins exceeded 2019 levels.

Even though costs per stay accelerated at a rate that far surpassed payments per stay, MedPAC says that scenario “is likely due to a combination of factors unique to the PHE, including spreading fixed costs over lower volume, increased wage rates and pandemic-related protocols and supplies.”

The projected Medicare margin for 2022 is approximately -10% without the relief funds and -9% when including the funds, according to the report.

“We anticipate that hospitals’ declining pandemic-related costs and increasing patient volume in 2022 relative to 2020 will be roughly offset by declining relief funds and uncompensated care payments,” the report states.

Concerns about future scenarios

During a January meeting, MedPAC members all supported the overall recommendation regarding payment rates, but some expressed reservations about certain issues.

For example, Brian DeBusk, PhD, the CEO of DeRoyal Industries, said workforce and supply chain trends pose complex questions for payment policymaking.

The labor-cost trend likely will “conflate this market-basket update with the hospital wage index calculation — with nursing workforce development in general — and it leaves us with a lot of policy to unpack beyond just this hospital update,” he said.

He added, “There’s a lot that’s going to have to go into this September market-basket update, and I hope that hospitals and other authoritative sources will provide CMS with the information they need because as provider relief funds recede, I think it’s going to be more obvious that these fundamental input costs have shifted and shifted dramatically.”

Jonathan Perlin, MD, PhD, president of clinical operations and chief medical officer with HCA Healthcare, said various developments bear watching heading into FY23, including:

• The end of the New COVID-19 Treatment Add-on Payment in conjunction with the end of the PHE
• The restoration of the Medicare payment sequester starting April 1
• The ongoing repayment of Medicare advance payments.

“I do worry that the reality for hospitals and, frankly, all provider sites in terms of the cost of labor actually is not going to be captured in a timely fashion by way of the wage index, and that’s going to be something that we have to look at going forward,” he said.

But Betty Rambur, PhD, RN, professor of nursing at the University of Rhode Island, said boosting payments to hospitals in response to concerns about wages might not translate to compensation for those on the front lines.

“Documented in the past, it hasn’t,” she said. “I think it would be advisable to consider a policy of payment changes that more directly bolster the conditions or rewards for those who are actually doing the hard work at the bedside.”