On December 7 and 8, 2023, the Medicare Payment Advisory Commission (MedPAC) held a virtual public meeting. In this meeting, MedPAC discussed its draft payment update recommendations. For each of the following types of services, MedPAC assessed payment adequacy based on beneficiaries’ access to care, quality of care, and the relationship between Medicare’s payments and costs. Based on these findings, MedPAC presented draft updated payment recommendations.

• Physician and other health professional services;
• Hospital inpatient and outpatient services;
• Hospice services;
• Outpatient dialysis services;
• Skilled nursing facility services;
• Home health care services; and
• Inpatient rehabilitation facility services.

The full agenda for the meeting and the presentations for the sessions are available here.

MEDPAC RECOMMENDS A PFS CONVERSION FACTOR UPDATE OF 1.3 PERCENT FOR 2025

Following the passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), the Physician Fee Schedule (PFS) became the only major Medicare payment system not indexed to a measure of inflation. While hospitals, hospices, skilled nursing facilities, and other settings of care have received yearly rate increases tied to inflation, MACRA set the yearly update for the PFS conversion factor (CF) at 0.5 percent from 2015 through 2019 and froze all updates from 2020 through 2025. After factoring in budget neutrality, the CF decreased every year from 2021 to 2024. Although MACRA does include incentive payments via participation in the Merit Based Incentive Program (MIPS) and Advanced Alternative Payment Models (A-APMs), physician payments have failed to keep pace with the intense inflation that has faced the healthcare industry over recent years, and Congress has had to step in to provide one-year CF increases each year from 2021 through 2024.

 In their October meeting MedPAC commissioners examined the long-term implications of maintaining the current PFS annual update under MACRA. While no formal recommendations were issued, the commissioners almost unanimously agreed that the current annual update system should be changed and that this change should be indexed to inflation. Accordingly, the chair’s draft recommendation was that for 2025, physician payment should be updated by half of the projected Medicare Economic Index (ME) increase, or 1.3 percent. The chair also recommended that the Centers for Medicare & Medicaid Services (CMS) establish add-on payments for PFS services for low-income beneficiaries, with primary care clinicians receiving 15 percent and all other clinicians receiving 5 percent. These add-on payments would not be subject to beneficiary cost sharing or budget neutrality.

MedPAC staffers find Medicare access remains strong despite lagging updates, struggle to measure quality of care

MedPAC staffers presented background on the PFS, including MedPAC research on beneficiary access to and quality of care and a comparison of physician revenues and costs. Regarding access, they found that Medicare beneficiaries ages 65 or older reported comparable or better access to care than privately insured individuals age 50-64 on a range of survey questions, and that clinicians were slightly more likely to accept new Medicare patients than new privately insured patients. One commissioner did point out, however, that the differences in ages may hurt the comparison, as individuals ages 50-64 are much more likely than Medicare members to work a traditional nine-to-five job, and therefore may have less availability when scheduling appointments. Other, more objective measures of access were similarly promising; the number of clinicians billing Medicare increased by 2.4 percent per year from 2017 to 2022, keeping pace with the increase in Medicare beneficiaries, and the number of encounters per beneficiary in fee for service (FFS) increased by 3.1 percent from 2021 to 2022.

Quality is much more difficult for the commission to measure. Medicare does not collect the clinical data necessary to measure quality over time at the FFS beneficiary level. The commission sees MIPS, which CMS uses to measure clinician performance, as fundamentally flawed, and has recommended eliminating the program in the past. Staffers measured quality of care using ambulatory care-sensitive hospitalization and emergency department visit rates and the Consumer Assessment of Healthcare Providers & Systems (CAHPS) survey patient experience scores for FFS members, both of which were stable from 2021 to 2022. Regarding physician revenues and costs, the staffers found that, despite MEI growth consistently surpassing CF updates, which saw cumulative increases of 48 percent and 12 percent respectively from 2000 to 2022, FFS spending per beneficiary outpaced both, growing 94 percent over the same period. Median compensation for physicians and advanced practice providers rose by 9 percent and 5 percent respectively in 2022, and the ratio of private insurance rates to Medicare FFS increased slightly from 134 percent in 2021 to 136 percent in 2022.

Commissioners discuss role of PFS in consolidation

The recommendation to increase the CF by half of the projected 2025 MEI increase was driven partially by fears of consolidation. While hospital-employed physicians have seen reimbursement for practice expenses increase each year via the Inpatient Prospective Payment System (IPPS) and Outpatient Prospective Payment System (OPPS), independent physician reimbursement has lagged. Given that practice expenses make up roughly half of total RVUs, the Commission believed that increasing the CF by half of MEI would help independent practices keep pace with hospital reimbursement (the recommended increase would not be tied in any way to the share of practice expense RVUS associated with a given code). The Commission was less concerned about reimbursement for the work portion of codes, as measures such as physician retirement and medical school applications do not point toward any concerns about the pipeline of future physicians.

Multiple commissioners cautioned against assuming hospitals acquiring physician practices was the driver of consolidation in the healthcare sector, pointing out that payers and private equity also employ a number of physicians, and payers have been driving much of the recent consolidation. Similarly, commissioners wanted to draw attention to other reasons physicians could consolidate, including the inability for small practices to keep up with regulatory requirements, and the economies of scale associated with denials, utilization management, prior authorization, coding optimization, electronic medical records, telehealth, and actuarial skills.

COMMISSION RECOMMENDS HOSPITAL PAYMENT BE UPDATED BY THE AMOUNT DETERMINED UNDER CURRENT LAW PLUS 1.5 PERCENT

The COVID-19 pandemic, a healthcare workforce shortage, shortages in critical drugs, and general inflation have made the last few years incredibly difficult for hospitals financially. Accordingly, the chair’s draft recommendation was that the that, for 2025, Congress should increase payment to hospitals by 1.5 percent in addition to current law.

MedPAC staffers find Medicare access remains strong, Medicare margins reach all time low

MedPAC staffers presented on four measures of payment adequacy for hospitals, access to and quality of care, access to capital, and FFS Medicare payments compared to hospital costs.

The staffers found beneficiary access to be adequate in 2022, with 67 percent of Acute Care / Critical Access Hospitals (ACHs) 650,000 beds being occupied. While the number of AHCs remained steady in 2021 and 2022, it declined in 2023, with eighteen hospitals closing and eleven opening. Low patient volumes were cited as the primary reason for closure. FFS member inpatient stays per capita, another indicator of patient access, has declined steadily since 2018, while outpatient stays per capita decreased slightly from 2021 to 2022.The incentive to serve Medicare members remained strong, with the FFS Medicare margins on OPPS and IPPS services at 5 percent. Quality of care indicators were mixed. While risk-adjusted mortality and risk-adjusted readmission rates recovered to pre-pandemic levels, most measures of patient experience declined relative t0 2018.

Regarding access to capital, IPPS hospitals’ all-payer operating margins declined steeply in 2022 after reaching record levels in 2021, falling from 8.8 percent to 2.7 percent. Preliminary data suggests this figure will improve slightly in 2023. Demand for hospital bonds remained strong, maintaining risk premium below the S&P US Treasury bonds 10-year index. The comparison between Medicare FFS payments and hospital costs was deeply concerning. IPPS hospitals’ Medicare margins decreased to record levels in 2022, at negative 11.6 percent (negative 12.7 percent when excluding Covid-19 relief funds). This was largely driven by inflation, which reached 5.7 percent for the hospital market basket in 2022. This margin is projected to improve to negative 8 percent in 2024.

Commissioners concerned by declining patient experience measures, role of commercial insurance in subsidizing Medicare

Commissioners were alarmed by the declining patient experience measures, such as only 69 percent of patients saying they would definitely recommend the hospital they stayed at and roughly half of patients saying they did not receive communications about medications when leaving the hospital. However, some commissioners suggested MedPAC staffers overstated patient access. One commissioner called for more granular analysis of hospital occupancy, pointing out that total occupancy being of 67 percent does not mean that there are not access concerns if there are many hospitals with high occupancy. Another pointed out that the sector is not lacking beds but rather the staff to serve those beds.

Commissioners also worried that commercial insurance was subsidizing Medicare and reiterated that Medicare rates should be able to stand on their own. One commissioner highlighted California as an example, where up to 17 hospitals could be facing closure next year. These hospitals are not facing volume losses, but rather do not have large enough commercial populations to subsidize what they lose on Medicare services.  Another pointed out that it would be difficult for hospitals to cut costs due to workforce and drug shortages, and that administrative costs were generally rising because of increasing regulatory and insurance expectations.

In response to concerns about different updates between physician and hospital reimbursement, the Chair reiterated the idea that the goal of the recommendation is not “fairness” across sectors but rather ensuring that Medicare beneficiaries have access to care in each sector.

COMMISSION RECOMMENDS CONGRESS ELIMINATE THE HOSPICE BASE PAYMENT UPDATE FOR FY 2025

For FY 2025, MedPAC recommends Congress eliminate the update to the 2024 Medicare hospice base payment rates. MedPAC found positive hospice payment adequacy indicators in the areas of beneficiary access to care, access to capital, and fee-fee-for-service Medicare payments and costs. The Commission’s recommendation also considered a quality analysis, which found stable hospice payment adequacy indicators. MedPAC’s payment update recommendation will decrease spending relative to current law. It is expected this recommendation will have no adverse effect on access to care and provider willingness and ability to treat beneficiaries.

Additionally, MedPAC reported research on non-hospice spending, which suggested variation in what services are classified as ‘related’. Staffers presented three possible policy directions for commissioner consideration:

• Direction 1. Administrative approaches: Create a more concrete definition of related; efforts to facilitate more information flow across providers, pharmacies, and Part D.
• Direction 2. Bundled payment approach: Unrelated services could be bundled into the hospice benefit with an increase to the base rate.
• Direction 3. Payment penalty approach: A payment penalty could apply to hospice providers whose patients have high non-hospice spending compared with other hospices.

Since commissioners broadly supported the draft recommendation, comments primarily focused on addressing quality of care in hospices and the three presented policy directions for research on non-hospice spending. Commissioners agreed with the need for updated quality metrics that promote patient-centered care in hospice, but there were varying suggestions on how this issue should be addressed. One commissioner suggested a hospice survey aligned with patient and family care goals, while another suggested a Medicare Advantage (MA)-like Star Rating for hospices. Regarding further research on non-hospice spending, commissioners were generally in favor of policy directions two and three. They requested further research on the possible downsides of bundling, how benefit designs need to change as the nature of aging in the U.S. is changing, comparing hospice stays under MA versus FFS, and clarification on whether hospice is provided in addition to or in replacement of another service.

MEDPAC RECOMMENDS CONGRESS UPDATE PAYMENT FOR DIALYSIS SERVICES BY THE AMOUNT SPECIFIED UNDER CURRENT LAW

Outpatient dialysis services under fee-for-service (FFS) Medicare are paid for as a per-treatment bundled payment that includes equipment, supply, labor, and drugs. Qualifying new equipment, supplies, and drugs receive a per-unit add-on payment. For CY 2025, MedPAC’s draft recommendation is that Congress should update the CY 2024 Medicare end-stage renal disease (ESRD) prospective payment system (PPS) base rate by the amount determined under current law. MedPAC’s payment adequacy analysis found positive indicators in the areas of beneficiary access to care and access to capital, stable quality of care, and mixed FFS payments and costs given varying Medicare margins based on treatment volume. This recommendation would have no effect on spending relative to current law. MedPAC expects that this recommendation would not have adverse effects on access to care, that providers would continue to be willing and able to treat FFS Medicare beneficiaries.

Commissioners broadly supported the recommendation and centered discussion around dialysis facility market dynamics. Consolidation plays a large role in the dialysis facility market, as high levels of vertical and horizontal integration give dialysis facilities more negotiating power compared to other facility types such as hospitals. Commissioners were particularly interested in more information on how these market dynamics impact Medicare Advantage (MA) coverage for dialysis patients, as MedPAC found that MA contracts paid 14 percent more per dialysis treatment on average than FFS in 2018. This figure is more pressing as the number of beneficiaries receiving ESRD treatment is declining in FFS and growing in MA, as Medicare beneficiaries with ESRD were permitted to enroll in MA in 2021. Other market trends that MedPAC staffers highlighted included indicators that the dialysis is attractive to for-profit facilities and investors, and that outpatient dialysis facilities have a strong financial incentive to serve FFS beneficiaries, with an 18 percent Medicare marginal profit.

MEDPAC RECOMMENDS CONGRESS REDUCE PAYMENTS FOR SKILLED NURSING FACILITY SERVICES BY 3 PERCENT FOR 2025

For FY 2025, MedPAC recommends the Congress should reduce the 2024 Medicare base payment rates for skilled nursing facilities by 3 percent. MedPAC expects that the SNF margin in 2024 will remain high, even with the downward adjustment to account for excess payment resulting from the new case mix system. MedPAC believes a reduction to SNF base rates is needed to more closely align aggregate payments to aggregate costs.

In October 2019, new changes to the patient driven payment model (PDPM) were put into effect, with the goal of improving targeting of payments for medically complex patients and therapy payments based on function and diagnosis. This change decreased minutes of therapy since it was no longer incentivized, and payments to SNFs increased by 4.6 percent above budget neutral amount. Additionally, there is a high marginal profit for SNF services with an average profit of 27 percent. Regarding quality, staffers noted that discharge to community rates and staffing ratios have both declined compared to pre-pandemic levels.

Much of the commissioner discussion focused on concerns with quality measurements, as they are quite complex and can sometimes be manipulated to provide a more favorable outcome. One of the commissioners proposed an “earn back” idea where facilities could earn back the 3 percent decrease through improving quality measures, such as staff turnover, which can then help pay living wages. Many commissioners supported this idea if the metrics used to measure quality are robust and not easily manipulated. One specific metric that the commissioners discussed that needs to be closely monitored is the community discharge rate because many beneficiaries are not going to be discharged to a community setting, and therefore could act as a disincentive for SNFs to take on such patients. The commissioners also highlighted the need for patient and family experience data for SNFs, noting that 50 percent of people leave the hospital and feel they are without adequate information.

Commissioners also discussed the difference in profit margins between non-profit and for-profit SNFs. Non-profits have a 1 percent margin and for-profits have a 22 percent margin. There is limited data available on this topic, but commissioners theorized that the difference may be due to Medicaid patients, the different care mixes, and the different patient groups having different staffing needs. Commissioners also discussed access to SNFs and noted that some beneficiaries do not have access because there are not SNFs in their county, and some patients are not able to access to SNFs because there are no beds available for their specific patient profiles.

COMMISSION RECOMMENDS CONGRESS REDUCE HOME HEALTH CARE SERVICES PAYMENT BY 7 PERCENT FOR 2025

For CY 2025, MedPAC recommends Congress reduce the 2024 Medicare base payment rates for home health care services by 7 percent. Access to home health care was adequate in 2022, with a 23 percent fee-for-service (FFS) Medicare marginal profit, suggesting a financial incentive for home health agencies (HHAs) with available capacity to serve FFS Medicare beneficiaries. Quality measures were generally positive in 2022, while the discharge to community rate declined. Despite being less capital intensive than other sectors, investor interest continues for HHAs. This is likely due to the continued strong financial performance of HHAs under FFS Medicare. This recommendation will decrease spending relative to current law. It is expected this recommendation will have no adverse effect on access to care and provider willingness and ability to treat FFS beneficiaries.

Since commissioners broadly supported the draft recommendation, discussion primarily consisted of suggestions for ongoing analysis. Commissioners requested additional research on community-initiated home health care in Medicare Advantage (MA) since MedPAC’s research primarily focused on the post-acute part of home health care. Commissioners also expressed interest in examining the influence of workforce and wage pressures across post-acute care settings to improve data, comparing rehospitalizations in these settings for all causes, quality measurement issues, and monitoring how private equity involvement and the migration of care to the home by some MA plans will impact this space in the future.

MEDPAC RECOMMENDS CONGRESS REDUCE PAYMENT RATES FOR INPATIENT REHABILITATION FACILITY SERVICES BY 5 PERCENT FOR 2025

For fiscal year 2025, MedPAC recommends Congress reduce the 2024 Medicare base payment rate for IRFs by 5 percent. This recommendation would decrease Medicare spending, as current law would give an update of 2.9 percent. MedPAC expects that there would be no adverse impacts on beneficiary access to care and that there would be continued provider willingness and ability to treat FFS beneficiaries, but some providers may face increased financial pressure.

Measures of access for IRFs were positive in 2022 with an increased number of beds, increased volume of FFS beneficiaries, and a stable occupancy rate. In 2022, approximately 51% of all IRF discharges were part of Medicare FFS and the marginal profit for hospital based IRFs and freestanding IRFs are 18% and 39% respectively. This shows the financial incentive for IRFs to continue serving FFS beneficiaries. These increases are consistent with a 4% increase in the use of SNFs. MedPAC staffers also noted differences between hospital-based units and freestanding facilities, noting the difference in patients and margins.

Commissioner discussion focused on the differences between different types of IRFs, specifically hospital based or freestanding clinics, as well as for-profit versus non-profit facilities. Although most of the differences are nuanced and under-researched, the commissioners agreed the main differences were where the patients come from, and what kind of care they are looking to receive. The commissioners also discussed the need for a more in-depth breakdown of Medicare Advantage (MA) beneficiaries as there is not much research done on how that population receives care from IRFs, especially dual eligible populations. Commissioners also discussed whether MedPAC should explore options to put pressure on Congress as Congress has been slow to respond to MedPAC recommendations; however, commissioners agreed that MedPAC’s success should not be determined based on how quickly Congress adopts their recommendations.

Commissioners also discussed IRF profit margins. IRFs have relatively high profit margins with 10 percent of hospital-based services having profit margins over 22 percent, and 25 percent having margins over 14 percent. Commissioners also considered whether margins are different between hospital-based and freestanding clinics and questioned if it has anything to do with patient selection, and the gray area around readmission. The commissioners also discussed the need for updating the qualifying conditions for IRFs since the list has not been updated in 15 years.

Chair Commissioner Michael Chernew ended the session by discussing the importance of evidence-based recommendations and using previous metrics to inform new policies, especially in areas with limited information available such as IRF care for beneficiaries with MA. Chernew also discussed communications with and timelines for Congress, noting how it is important to continue creating comment letters and updating recommendations for both the public and for congressional records to show continuity.

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This Applied Policy® Summary was prepared by Emma Hammer with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact her at ehammer@appliedpolicy.com or at 202-558-5272.