Medicare Payment Policy

percent due to two factors. First, services continued to shift from inpatient to
outpatient settings. Second, hospitals increasingly billed for outpatient services
that had previously been billed as services provided in physicians’ offices.
For example, physician evaluation and management (E&M) visits billed as
outpatient services increased by 7 percent in 2010 and 8 percent in 2011.
Similarly, outpatient echocardiograms increased by 18 percent in 2011. In
2012, the Commission recommended equalizing E&M payment rates between
physicians’ office and hospital settings. This change would remove the financial
incentive to shift E&M visits from lower cost office visits to higher cost
outpatient visits (Medicare Payment Advisory Commission 2012c).
Quality of care—Quality continues to improve on most measures. Hospitals
reduced 30-day mortality rates across five prevalent clinical conditions and
readmission rates improved slightly from 2008 to 2011. A penalty for aboveaverage
readmission rates started in fiscal year 2013. However, it is too soon to
know if the penalty will stimulate greater reductions in readmissions.
Providers’ access to capital—Access to capital is good due to strong hospital
earnings in recent years and low interest rates. Hospitals’ level of construction
spending remains stable at $26 billion per year, with a slight decline in bond
offerings.
Medicare payments and providers’ costs—The overall hospital Medicare margin
declined from –4.5 percent in 2010 to –5.8 percent in 2011. The margin declined
primarily because CMS reduced inpatient payment rates in 2011 to recover
overpayments in 2008 and 2009 due to documentation and coding changes. The
result was a slight decline in inpatient payment rates in 2011 and a decline in
inpatient revenues. Overall margins declined only 1.3 percentage points in part
because of temporary payments for health information technology and other policy
changes that increased payments by over $2 billion in 2011. We project that margins
in 2013 will remain roughly equal to 2011 levels. We expect payment rates to
grow more slowly than costs and we expect an increase in supplemental Medicare
payments to hospitals that achieve meaningful use of electronic medical records,
resulting in Medicare margins remaining at roughly –6 percent from 2011 through
2013.
Efficient providers—While Medicare payments are currently less than costs for the
average hospital, a key question is whether current Medicare payments are adequate
to cover the costs of efficient hospitals. To explore this question, we examined
financial outcomes for a set of hospitals that consistently perform relatively well
on cost, mortality, and readmission measures. We find that Medicare payments
42 Hospital inpatient and outpatient services: Assessing payment adequacy and updating payments