Medicare Payment Policy

covered the fully allocated costs of the median efficient hospital, which generated a
2 percent Medicare margin in 2011.
The inpatient payment update recommendation is based on four factors. First,
updates must be restrained to maintain pressure to control costs. Second, most
payment adequacy indicators (including access to care, quality of care, and access
to capital) are positive. Third, hospitals changed their documentation and coding in
response to the introduction of Medicare severity–diagnosis related groups in 2008,
and the effect of these documentation and coding changes on payments needs to be
offset. Fourth, while hospitals’ aggregate Medicare margin is projected to remain
at roughly –6 percent, the set of relatively efficient hospitals had a median overall
Medicare margin of 2 percent. Balancing these factors, we recommend increasing
payment rates for the inpatient and outpatient prospective payment systems in 2014
by 1 percent. In other words, all else being equal, the per case payment a hospital
receives in 2014 should be 1 percent higher than it was in 2013. For inpatient
services, CMS should use the difference between the 2014 statutory update and the
recommended 1 percent increase to offset the costs to the Medicare program from
changes in hospitals’ documentation and coding.
Despite negative overall Medicare margins, the Commission also recommends
a 1 percent increase in outpatient rates in 2014 for three reasons: First, pressure
to constrain costs should be maintained. Second, outpatient volume has grown
significantly, by more than 4 percent. Third, hospital outpatient payment rates are
already substantially higher than payment rates for similar services in other sectors.
This difference in payment rates has contributed to a shift in the site of care from
less expensive settings to the hospital setting. Any higher increase in hospital
outpatient rates would exacerbate this problem. ■
Report to the Congress: Medicare Payment Policy | March 2013
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