“Gaming the System” Almost a Requirement to Maintain Medicare Funding

Whenever the federal government changes the way Medicare dollars are disbursed, some health care providers and practitioners are winners, and some are losers, and it often has nothing to do with how health care is provided. Sometimes it’s just because Congress has to offset spending in a piece of legislation. Sometimes it’s only an issue of geography. Whatever the reason, if Medicare revenue shrinks, providers are likely to look for ways to take advantage of existing laws and regulations, or fight to change them.

When the American Taxpayer Relief Act of 2012 (P.L. 112-240) was enacted, it averted a 26.5 percent cut in Medicare physician payments in 2013, providing $10.6 billion in additional Medicare revenue for doctors, and $25 billion more over 10 years (see “Congress Passes Bill to Avoid “Fiscal Cliff,” With Medicare Doc Fix, Other Medicare/Medicaid Extensions”). But that extra money for physicians isn’t coming from extra appropriations from Congress. It has been taken from other Medicare spending. According to a Congressional Budget Office analysis of the legislation, hospitals will face even more intense scrutiny of how they apply Medicare Severity-Diagnosis-Related Groups codes, with the expectation that increased audits will save Medicare $10.5 billion over 10 years. End-stage renal disease facilities will receive $4.9 billion less over 10 years. Some hospitals will get fewer Medicaid dollars–$4.2 billion less (although not until 2021)– because CMS will change the way it calculates the allotment of money for hospitals serving a disproportionate share of poor people.

The Boston Globe recently reported on what hospitals (outside Massachusetts) call the “Baystate Boondoggle,” in which a change in the way that Medicare payments to hospitals are calculated has specifically benefited hospitals in Massachusetts, at the expense of hospitals in every other state.  The Centers for Medicare and Medicaid Services (CMS) use a complex formula to determine how hospitals are reimbursed under Medicare, and part of that calculation involves the wages paid by hospitals for all their employees. Each year, CMS tinkers with the wage index that takes into account such things as the cost of living in certain areas and the commuting patterns of hospital workers. One of the ideas behind the wage index is to adjust Medicare dollars devoted to salaries to account for whether a hospital is in an urban or rural area. The cost of living in urban areas is generally higher than in rural areas, so urban hospitals tend to get more money than rural areas.

Under sec. 3141 of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148), CMS amended how the “rural floor” is calculated and paid for.  Basically, the “rural floor” rule means that no urban area can have a lower wage index than rural areas of the state.  A March 2012 report from the Medicare Payment Advisory Commission noted that there was no “empirical support for this policy, which implicitly assumes that rural areas always have wages that are equal to or below urban areas.” The MedPAC report noted that “to pay for the additional payments that some hospitals receive because of the rural floor, PPACA mandated that the Secretary of HHS enact a national budget-neutrality factor”; in effect, any gains in Medicare payments in one state would have to be offset by decreases in other states.

Both the MedPAC report and the Boston Globe story detail what happened next — a hospital located on the island of Nantucket deactivated its status as a critical access hospital and was redesignated as a rural hospital — the only hospital in Massachusetts with that designation. It was then purchased by a Boston hospital. Wages on the island are high because it is isolated and has a high cost of living. The result — 81 out of 82 hospitals in Massachusetts received more money than they would have before the Nantucket hospital changed its status — 0ver $256 million more in 2013. This is offset by hospitals in other areas of the country, notably in New York ($56 million less), Texas ($47 million less), Florida ($37 million less), and Illinois ($35 million less).

Twenty-one state hospital associations are calling on Congress and the Obama administration to change the law. The issue is likely to be part of the federal spending cuts negotiations that will occupy much of Congress’ time between now and the end of February.