Each June, the Medicare Payment Advisory Commission (MedPAC) is required to report to Congress on the Medicare program. This report includes chapters on:

• Approaches for updating clinician payments and incentivizing participation in alternative payment models;
• Provider networks and prior authorization in Medicare Advantage (MA);
• Assessing data sources for measuring health care utilization by Medicare Advantage enrollees: Encounter data and other sources;
• Paying for software technologies in Medicare;
• Considering ways to lower Medicare payment rates for select conditions in inpatient rehabilitation facilities (IRFs); and
• Medicare’s Acute Hospital Care at Home program.

The report was released on June 13, 2024 and can be found here.

MEDPAC APPROACHES FOR UPDATING CLINICIAN PAYMENTS & INCENTIVIZING PARTICIPATION IN ALTERNATIVE PAYMENT MODELS

During the recent MedPAC meeting cycle, the Commission conducted research and deliberated on approaches to updating clinician payments and incentivizing participation in advanced alternative payment models (A-APMs). They consider two approaches for updating fee-for-service (FFS) Medicare’s physician fee schedule (PFS) payment rates and contemplate temporarily extending the bonus for participation in advanced alternative payment models. These approaches focus on accounting for cost growth and ensuring continued and improved access for beneficiaries.

In the annual Medicare PFS, clinical services are assigned a value, measured by relative value units (RVUs). RVUs are determined by clinician work, practice expense, and professional liability insurance (PLIs) costs – reflecting resources used and accounting for any variability. The MACRA framework, established in 2015, currently governs payment updates, emphasizing performance-based incentives and aiming to ensure the adequacy and sustainability of payment rates. Currently, payment rate updates are based on three main components: (1) volume performance standard, (2) sustainable growth rate, and (3) MACRA updates.

Medicare beneficiaries tend to have a higher utilization of care, better payment rates, and are more likely to be satisfied with their care when compared to those with private insurance. Short and long-term measures of care continue to remain positive and grow. The Commission continually assesses the adequacy of the payments and impact on beneficiaries. To ensure continued access and quality, the Commission looks to address:

• Adequacy of future payments to clinicians, as clinician costs (due to inflation and lack of rescaling Medicare Economic Index (MEI)) are expected to exceed growth accounted for within the Medicare FFS payment rates. These projected increased input costs may lead to a reduction in clinicians accepting Medicare beneficiaries, or even a total opt-out.
• Medicare site-of-service payment differentials (differing payment rate for Hospital Outpatient Departments vs freestanding clinics) are likely to contribute to vertical consolidation, which may cause increased payment rates and decreased quality of care.
• Insufficient incentive for physicians to participate in Advanced Alternative Payment Models (A-APMs) for the next decade; due to the removal of the participation bonus in 2025 and, instead, updating clinician payment rates differently depending on participation in A-APMs. With less incentive to participate in A-APMs, a decrease in both quantity and quality of services is projected.

To account for these concerns, the Commission presents two policy approaches for updating the Physician Fee Schedule (PFS) payment rates based on inflation measures, highlighted below:

1. Updating the practice expense (PE) portion of fee schedule payment rates by the hospital market basket, adjusted for productivity. This update would be facilitated by the creation of two conversion factors (CFs): (1) CF that would apply to the PE portion of each service and (2) CF that would apply to the work and PLI portion of each service. As a result, payment rates for different services vary based on the proportion of PE in total payment. This leads to varied payment rate increases, with high-PE services receiving larger updates and low-PE services receiving smaller ones. The impact includes more equitable payment growth between office settings and hospital outpatient departments, potentially reducing clinician consolidation, but also creating disparities in payment rate increases across different medical specialties and services, particularly between primary and specialty care.
2. Update total fee schedule payment rates by the Medicare Economic Index (MEI), accounting for productivity, minus 1 percentage point (Commission’s Preference). This percentage, which accounts for inflation faced by clinicians, would apply to a single conversion factor for all Relative Value (RVU). To prevent updates from being too low, a “floor” ensures annual updates are no less than half of the MEI. For example, if the MEI grows by 4 percent, the update is set at 3 percent, with a floor of 2 percent. This method assumes that both practice expense (PE) and work costs increase over time if payment updates are consistent. The approach aims to distribute payment rate increases evenly across services, supporting fair growth among various medical specialties, while maintaining the “relative value” concept of the PFS. It looks to ensure clinician supply and access to care remain stable, without necessitating frequent policy revisions. However, it does reduce payment growth differences across site-of-service settings slightly less than Approach 1, potentially incentivizing vertical consolidation.

The Commission finds Approach 2 more desirable and will continue to develop this option in the future. To tailor the Approach 2 mentioned above, the Commission highlights a recommendation to incentivize continued participation in A-APMs, highlighted below:

1. Along with Approach 2, temporarily extend the current A-APM participation bonus if the Merit-Based Incentive Payment System (MIPS) is not repealed. Extending the bonus through the late 2020s would help support clinician participation in A-APMs, rather than solely favoring MIPS. The incentive to join A-APMs would continue to encourage increased accessibility, coverage and higher quality care, especially given the uncertain impacts Approach 2 may have on physician incentive programs.

MEDPAC ASSESSES PROVIDER NETWORKS AND PRIOR AUTHORIZATION IN MEDICARE ADVANTAGE

MEDPAC HIGHLIGHTS CONSTRAINTS WITH MONITORING NETWORK ADEQUACY AND ESTABLISHING ACCURATE PROVIDER DIRECTORIES IN MA PLANS

CMS has established network adequacy standards for MA contracts that consist of minimum provider numbers, maximum travel time and/or distance to providers, and maximum wait times. Currently, the minimum provider-to-beneficiary ratio is established nationally and varies by specialty type and geographic designation. Minimum-number standards for primary care and for metropolitan areas are generally larger than for other providers and areas. To encourage the entry of new MA plans into rural areas, in CY 2021, the percentage of beneficiaries who must reside within the maximum time and distance standards in non-urban counties was reduced by 5 percent. These revised standards also provided two routes for plans to receive a 10 percent credit towards meeting travel time and distance standards: (1) by contracting with telehealth providers in certain specialties, and (2) for affected provider and facility types in states with anticompetitive measures that restrict the number of providers or facilities in the state. These revised standards are additive and further analysis is needed to determine whether “credited” standards sufficiently support adequate access to care for rural enrollees. Beginning in 2024, contracts applying for new or expanded service areas receive a 10 percent reduction in the required number of beneficiaries within travel time and distance standards in the provisional service area. Additionally, requirements for plans to establish standards for the timeliness of primary care services were codified and extended to behavioral health services as of this year. CMS has not proposed any new monitoring or enforcement mechanisms alongside these changes to adequacy standards.

CMS verifies that Medicare Advantage organizations (MAOs) are compliant with network adequacy criteria at the contract level through a three-year review cycle (also known as the triennial audit). Audits can also be triggered under special circumstances, such as submission of a network access complaint by an enrollee. When gaps in a network are identified, CMS provides plans with a list of suitable providers with whom to contract. MAOs must then expand their network of providers or request an exception to the network adequacy criteria. CMS denies a majority of these exception requests.

For CMS to best assess network adequacy, plans’ provider directories must be accurate, which is also of great importance to beneficiaries. The current system for creating and maintaining provider directories is inefficient and costly and imposes a significant burden on plans and providers. Plans maintain their own directories and provider groups must submit their information to each plan they contract with, and plans have little recourse if providers don’t update their information regularly. A 2018 evaluation of the accuracy of MAO online directories found that roughly half had at least one inaccuracy. In 2021, CMS began publicly reporting providers whose contact information was incomplete or out of date, but this was found to be insufficient to remedy these inaccuracies. Additionally, these inaccuracies were found to negatively impact beneficiaries’ access to behavioral health services. Due to the immense consequences of not maintaining accurate provider directories, CMS has proposed maintaining a national provider directory or allowing beneficiaries to search by provider in the Medicare.gov Plan Finder, to ensure their ability to make informed plan choices.

MEDPAC EVALUATES PRIOR AUTHORIZATION REQUIREMENTS AND IMPACT ON ACCESS TO CARE IN MA PLANS

In recent years the use of prior authorizations by MA plans has greatly increased. In 2021 it was found that overall, 95 percent of prior authorization requests in MA plans had fully favorable decisions and negative determination rates ranged from 3 percent to 12 percent across the largest MAOs. Of the negative prior authorization decisions for which providers or beneficiaries requested a redetermination, a majority were overturned and issued approval. For the determinations that were not overturned, the MA plan’s decision to do so was upheld by an independent review entity (IRE) in most cases. If an MA plan upholds an adverse prior authorization decision after reconsideration, the plan must automatically forward the case file and its decision to an IRE, an outside organization under contract with CMS.

 Currently, CMS has several tools to monitor MA plans’ use of prior authorization:

• Each year CMS audits a sample of MAOs in several program areas, including coverage determinations and appeals, to measure compliance with the terms of its contract with CMS. CMS requires MAOs to implement corrective action plans to address audit violations and may impose civil monetary penalties and sanctions for serious violations.
• MA contracts are required to report the number of determinations and reconsiderations for services and the outcomes of the reviews. CMS can use these data to oversee MA contracts’ denial and appeal rates.
• CMS publicly reports on Medicare.gov’s Plan Finder two administrative measures of the decisions in the IRE step of the appeals process: (1) whether a health plan makes timely decisions about appeals and (2) the fairness of the health plan’s appeal decisions as assessed by an independent reviewer. These measure results are used in calculating star ratings and are assigned the highest weight in this calculation.

Despite the use of these tools, there are several gaps in the information CMS currently collects from MA insurers. For example, MA contract-level reporting prevents the comparison of rates of prior authorization and outcomes by plan type. Additionally, MA contracts are only required to report aggregate data and thus prior authorization requests or outcomes by service type, specialty, or beneficiary characteristic are unknown.

Stakeholder concerns about MA prior authorization requirements and processes include that MA plans are inappropriately denying prior authorization requests; that providers find prior authorization to be an increasing burden; and that prior authorizations may cause enrollees to delay care, abandon care, or pay out of pocket. Recently, some insurers have taken steps to reduce the administrative burden on providers, but it is too soon to determine the effects of these actions. Additionally, despite the denial of only a small portion of prior authorization requests, in 2018 Office of Inspector General (OIG) audits suggested that many denied requests should have been approved. OIG highlighted two common causes of these denials: (1) MA plans used clinical criteria that are not contained in Medicare coverage rules, which led to plans denying requests for services that OIG physician reviewers deemed medically necessary, and (2) MA plans indicated that some prior authorization requests did not have enough documentation to support approval, yet OIG reviewers found that the beneficiary medical records already included in the case file were sufficient to support the medical necessity of the services.

CMS recently finalized several regulatory changes, which took effect in 2024, to address these concerns:

• CMS requires that MA plan prior authorization policies be used only to confirm the presence of diagnoses or other medical criteria and/or ensure that an item or service is medically necessary.
• MA plans must comply with national and local coverage determinations and with general coverage and benefit conditions included in FFS Medicare statutes and regulations, as interpreted by CMS.
• Prior authorization approval given by an MA plan is required to be valid for as long as necessary to avoid disruptions in care, in accordance with applicable coverage criteria, the patient’s medical history, and the treating provider’s recommendation.
• MA plans must establish a utilization management committee to review policies annually and ensure consistency with FFS Medicare’s national and local coverage decisions and guidelines.

Additionally, beginning in 2026, MA plans will be required to include specific reasoning regarding the denial of individual prior authorization requests, send prior authorization decisions within seven calendar days for standard requests (instead of the current fourteen-day requirement), and will have to publicly report prior authorization metrics on their websites. Beginning in 2027, CMS will require MA plans to build and maintain an open-source interface that would automate the process of determining whether a prior authorization is required for providers, identify prior authorization information and documentation requirements, and facilitate the exchange of prior authorization requests and decisions from electronic health records or practice management systems. This automation has the potential to reduce the administrative burdens of prior authorization for providers.

MEDPAC ASSESSES DATA SOURCES FOR MEASURING HEALTH CARE UTILIZATION BY MEDICARE ADVANTAGE ENROLLEES: ENCOUNTER DATA AND OTHER SOURCES

In 2019 MedPAC made recommendations to Congress to improve the completeness of encounter data through the creation of thresholds of completeness and accuracy to evaluate how well MA organizations met these standards. MedPAC also recommended withholding plan payments to MA organizations that could not meet the thresholds. In a 2020 and 2021 data review, the completeness of encounter data increased, showing that the changes in policy made in the previous years helped to improve completeness of encounter data. There is still variation in completeness of data both across and within MA plans.

When comparing MA encounter data with other sources, such as Medicare Provider Analysis and Review (MedPAR) for inpatient stays, Dialysis risk-adjustment indicator for dialysis services, Minimum Data Set (MDS) for skilled nursing stays, and Outcome and Assessment Information Set (OASIS) for home health services, MA encounter data appears to be incomplete. MedPAC recommends that anyone using MA encounter data without supplementing it with other sources should have an understanding that there is missing or incomplete data. To look for differences between the MA encounter data and the other sources MedPAC assessed if records for MA enrollees were in both data sources and for MedPAR data MedPAC evaluated if the same hospital stays were in both records. About 83 percent of stays were noted in both the MedPAR data and the encounter data.

Completeness was also evaluated within MA contracts. The overall number of contracts that reported at least one encounter in all six service categories has improved by 16 percent from 2015 to 2020. However, contracts that had high completeness in one sector did not translate to having completeness in all sectors. Out of the 354 HMO and PPO contracts that enrolled at least 2,500 enrollees in July 2020 and had at least 10 records for each service category, 311 contracts had an average encounter match rate of 97 percent of inpatient services with MedPAR records. In the 311 contracts the lowest match rate was 84 percent for skilled nursing, then 88 percent for home health, and 94 percent for dialysis service use.

MedPAC compares MA reported data with independent, provider-submitted data sources to assess how complete the encounter data is. When compared to HEDIS data for hospitalization records, encounter data varied significantly. In this case encounter data included 11 percent more hospitalizations and 19 percent more readmissions which made it more of a complete source. This is believed to be because of the specific instructions for HEDIS reporting that exclude several hospitalizations. MedPAC also compared MA encounter data to bid data which includes information about the use of services and spending of each the members in each MA plan. There is no clear trend in inconsistencies between bid data and MA encounter data although there is a significant difference in bid data utilization rates and MA encounter data rates. Some of these inconsistencies are due to the limited data set and inconsistent reporting of visits.

The Commission recommends to continue improving the completeness and accuracy of encounter data through creating thresholds for measuring data completeness and providing financial incentives. More analysis and completeness of encounter data could alter MA star ratings, quality bonus payments, and plan rebates and could be used to improve the MA program more broadly.

MEDPAC HIGHLIGHTS CONCERNS AND CONSIDERATIONS FOR MEDICARE COVERAGE OF SOFTWARE TECHNOLOGIES

The Commission classifies FDA cleared or approved medical software, which the FDA has classified as software as a medical device (SaMD), into two distinct categories:

• Software as a service (SaaS), which is algorithm-driven software that helps practitioners make clinical assessments, including decision support intervention software, clinical risk modeling, and computer-aided detection (CAD).
• Prescription digital therapeutics (PDTs), which are software products that (1) receive market authorization by the FDA to manage or treat an injury or disease; (2) are prescribed by clinicians; (3) are typically administered by patients on a mobile device; and (4) primarily use software to diagnose or treat an illness or injury.

After receiving clearance or approval from the FDA, SaaS and PDT manufacturers can seek Medicare coverage for their product. Medicare covers items and services under Part A or B that are:

• included in a Medicare benefit category;
• not statutorily excluded;
• reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member; and
• approved or cleared by the FDA, which is specific to Part B drugs, devices, and certain laboratory tests.

All items and services covered under Part A or B must also be covered in Part C of Medicare (MA) except for hospice care and kidney acquisition costs, which are carved out of MA. In addition, all SaaS and PDT items that are covered under FFS Medicare are either separately payable or packaged. Historically, Medicare has covered SaaS technologies when the services met Medicare’s coverage criteria. However, PDTs have generally not been covered because they do not meet these criteria. Currently, neither SaaS nor PDT technologies are explicit Medicare benefit categories however, Medicare covers such services under two circumstances:

• Services that can be reimbursed based on an existing billing code or bundled payment system, unless existing local or national coverage determinations define or restrict when Medicare will pay for providing the service.
• For a service assigned a new billing code, Medicare will determine whether the service is included in a Medicare benefit category and therefore eligible for Medicare payment. This process may or may not require an explicit coverage determination.

In recent discussions, stakeholders have expressed concern that Medicare’s payment systems do not yet account for most of the medical devices that involve artificial intelligence (AI) technology. Stakeholders have also noted differences between the physician fee schedule (PFS) and outpatient prospective payment system (OPPS) in Medicare payment policies for SaaS products. CMS has not created national payment rates under the PFS for most SaaS items and payment is determined on a case-by-case basis by Medicare administrative contractors (MACs). In contrast, there are specific payment rates for each SaaS item covered under the OPPS. In the rulemaking that set 2023 payment rates in the OPPS, CMS dedicated much discussion to coverage of and payment for SaaS items. In response to this rulemaking, the Commission advised CMS to continue to seek ways to increase the amount of packaging and the extent to which SaaS and other items and services can be bundled based on encounters or episodes of care. For hospital inpatient care, FFS Medicare also covers and pays for software as part of the broader bundled payment made for each hospital stay. In a few cases, software products have received new technology add-on payments. Under Medicare’s durable medical equipment (DME) fee schedule, medical software that is embedded in a device and integral to the device’s function is covered if the device meets the DME’s definition for coverage: the device can withstand repeated use, lasts at least three years, primarily serves a medical purpose, is not useful in the absence of illness or injury, and is appropriate for home use. Despite these criteria generally resulting in a lack of coverage under the DME benefit for software residing on beneficiaries’ personal devices, in 2022 CMS established a new HCPCS Level II code pertaining to this type of medical software.

A key issue for FFS Medicare is how to cover medical software that is generally separate from the medical device in a way that balances promoting access to new technologies with affordability for the Medicare program. The Commission supports larger payment bundles for the hospital inpatient and outpatient PPSs and the end-stage renal disease PPS. The Commission reiterates that this gives providers opportunities to be flexible in the provision of care and incentivizes the use of the most cost-efficient models. In contrast, paying separately for software technologies may limit competition, which generates price reductions for like services, and can lead to overuse, which may have significant financial implications for FFS Medicare. The use of larger payment bundles can also provide useful signals about which SaaS items are effective and improve efficiency of care. Currently, FFS Medicare has few pricing tools that would help strike a balance between maintaining incentives for innovation and ensuring affordability. To address this, the report maintains that policymakers could consider adjusting a service’s payment rate using a modifier for new software technologies, such as one based on the extent to which the software reduces clinician work time.

Other approaches include setting a payment rate for new software products based on a market price, that is determined by the manufacturer’s pricing decisions, or based on a new product’s net clinical benefit compared with the standard of care. During these discussions, concerns have been noted regarding how to ensure that technologies being developed result in improved health outcomes. To ensure this, Medicare could require that a manufacturer of a SaaS/PDT provide evidence that its product results in a clinically meaningful improvement when compared to the current standard of care. Alternatively, for a technology that lacks clear evidence regarding its positive effect on care, Medicare could apply a coverage with evidence development policy that links a service’s national coverage to the collection of additional data. Currently, the Commission is in the initial stages of considering how Medicare should pay for medical software but has long maintained that the goal of Medicare payment is to maintain beneficiaries’ access to high-quality services while encouraging efficient use of resources.

MEDPAC CONSIDERS WAYS TO LOWER MEDICARE PAYMENTS FOR SELECT CONDITIONS IN INPATIENT REHABILITATION FACILITIES

Medicare’s fee-for-service (FFS) payments to inpatient rehabilitation facilities are high relative to the cost of care. The MedPAC Commission considers alternative approaches to lower FFS payment rates to IRFs for beneficiaries with select conditions. To differentiate IRFs from acute care hospitals, 60 percent of an IRF’s admissions must be patients with 1 of the 13 conditions that typically require more intense rehab. The other 40 percent of patients in an IRF do not have to contribute to this compliance threshold and are referred to as “noncompliant” cases. Although CMS has relied on this list of 13 conditions, some question whether a clinical condition is enough to identify patients who need this intensive care. In 2018, the Office of Inspector General (OIG) found that IRFs sometimes admit patients inappropriately. Some patients who have one of the 13 listed diseases may not need to be treated in an IRF, and some patients with other conditions do. If it were possible to perfectly identify the patients who need this intensive care, policymakers could narrow the payment differences between skilled nursing facilities (SNFs) and IRFs. But differentiating patients is difficult without medical records. Generally, the Commission found that IRF patients were younger, less medically complex, and had fewer impairments. If IRF and SNFs treated similar patients, lowering payment rates for select conditions could be possible, but since it is difficult to draw conclusions, Medicare has different requirements for each setting.

Without being able to discover differences in outcomes for patients treated in IRFs and SNFs, the Commission considered three approaches to lower payment rates for patients with noncompliant conditions.

1. Rates would be lowered to the amount paid to SNFs.
2. IRF payment rates would be lowered so that in aggregate they would equal the cost of care.
3. Payment rates would be based on a blend of current rates and rates that equal the cost of care.

The first approach would have the largest reductions, then approach two, and finally approach three would have the smallest reductions to rates and would have the lowest impact on IRF admitting practices. Because the last two approaches would have smaller reductions, IRFs would have less incentives to disrupt or change the care provided to the beneficiaries.

The Commission also assessed whether a targeted reduction was a reasonable approach to lower IRF payments. Multiple factors were considered that ultimately led the Commission to the conclusion that their recommendation to lower payment rates for all cases was the best course moving forward. They plan to re-evaluate their recommendation about the aggregate level of payments in December 2024. Finally, the Commission recommends that, in addition to the payment rates, CMS and Congress consider ways to improve the definition and identification of cases that do and do not need IRF care. CMS could increase auditing of IRF admissions if more funds were allocated to IRFs, as the current auditing levels of IRFs are between one and three percent of IRF claims.

MEDPAC ASSESSES MEDICARE’S ACUTE HOSPITAL CARE AT HOME PROGRAM

During the COVID-19 pandemic, there were concerns about a shortage of acute care hospital capacity and this led CMS to establish the Acute Hospital Care at Home (AHCAH) program in fee-for-service (FFS) Medicare. This program was set to expire after the public health emergency, but Congress extended it through December 31, 2024. In this Chapter of the June 2024 MedPAC Report to Congress, the Commission assessed the experience of hospitals and beneficiaries in the Medicare AHCAH program. Under the AHCAH, hospitals apply to CMS to provide inpatient acute care at home. The payment for AHCAH cases is the same as the amount Medicare would have paid for an in-hospital acute care stay under IPPS.

CMS reported in April 2024 that even though 328 hospitals had been approved to participate, many hospitals did not implement programs. The MedPAC Commission staff conducted interviews with hospitals participating in the AHCAH program. The hospitals explained in the interviews that there were challenges getting their programs started and patients would often decline at home care. The limited uptake of this program reflects the implementation challenges that hospitals faced. Additionally, the cost per unit of service can be higher due to the additional costs and inefficiencies of providing care to patients in their homes, so the program may not help hospitals as greatly as they had hoped.

If the program continues, the Commission recommends that policymakers consider three things for the care provided:

1. Measure outcomes for the program to safeguard the quality of care;
2. Ensure that beneficiaries using AHCAH require the same high level of care; and
3. Set FFS payments appropriately.

Understanding these three aspects may help CMS identify areas of potential change for AHCAH. The critical unanswered question the MedPAC Commission poses for CMS is whether providing AHCAH is less costly than inpatient hospital care. Results from the assessment indicate that patients who participate in AHCAH receive less services, but the cost per unit of service may be higher. If AHCAH volume increases, a better understanding of hospital costs under the program will be needed. However, MedPAC explains that it is challenging to compare the costs of AHCAH and non-AHCAH services. In the future, the Commission suggests that CMS consider if FFS Medicare is the correct payment system for AHCAH, especially if participation increases.

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