Changes to Hospital and SNF Payment Systems Considered by MedPAC

At its meeting on December 12th and 13th, the Medicare Payment Advisory Commission (MedPAC) discussed  draft recommendations that would increase hospital inpatient and outpatient payments by 3.2 percent.  The draft recommendations, however, would make dramatic cuts to payments to long-term care hospitals (LTCH) and reduce payments for 66 services provided at hospital outpatient departments.  The net result would be an increase in payments of $500 million dollars in 2015.  MedPAC recommended no increase in payments to skilled nursing facilities (SNFs) in 2015 and discussed a draft recommendation that would reduce payments by 4 percent in 2016. By law, each year MedPAC is required to assess the adequacy of hospital payments and recommend payment updates for hospital inpatient and outpatient services as well as for long-term care facilities.

Hospital Payments

The 3.2 percent increase in payments for services provided under the inpatient prospective payment system (IPPS) that MedPAC is recommending would result in an additional $2.5 billion in payments during the 2015 rate year. However, the recommended $2.0 billion reductions in payments under the LTCH and outpatient prospective payment systems (OPPS) would result in a net increase in spending on hospital services of $500 million.

Equalization of Payments for Outpatient Services

MedPAC’s draft proposal would reduce the payment for 66 services under the OPPS to the  level of payment that would be made to a physician’s office for the same services.   MedPAC hopes this payment adjustment would slow or stop the shift of services from free-standing practices to more expensive outpatient departments.   MedPAC estimates that this shift from outpatient departments to free-standing practices would reduce a hospital’s  revenue by  0.6 percent.  In addition the shift would result in beneficiaries paying $1.1 billion less in copayments and deductibles.

LTCH Payment Rates

  Payment rates for patients in LTCHs who are not chronically, critically ill (CCI) would be the same as for patients in IPPS.  CCI patients would be defined as patients who had a stay of eight days or more in an intensive care unit  immediately preceding an IPPS or LTCH stay. MedPAC estimates that this change will decrease spending on LTCHs by roughly $2 billion.  The money saved by this reduction would  be used for additional outlier payments for CCI patients in IPPS hospitals.  Joanna Hiatt Kim, vice-president of payment policy for the American Hospital Association  (AHA) said, “we are deeply disturbed by the Commission’s draft recommendation to cut payments to 64 percent of the LTCH cases.”  This recommendation is being made as an alternative to ending the LTCH prospective payment system altogether, which was an option considered but never adopted.


MedPAC is recommending no increase in payments to SNFs for 2015 and a reduction of 4 percent in 2016. The recommendation was made because the operating margins,  or profits,  for SNFs are estimated to be 12 percent in 2014 and have been above 10 percent each year since 2000. MedPAC made the same recommendation in 2012.

Earlier in 2013, the Office of Inspector General  (OIG) reported that Medicare paid $5.1 billion for SNF stays that failed to meet the quality of care requirements. In 37 percent of the SNF stays, the facilities failed to develop plans of care that met requirements or failed to provide care that was consistent with a patient’s plan of care.  In 31 percent of stays, the SNFs failed to meet discharge planning requirements.  These figures are based on the OIG’s review of Part A SNF stays from calendar year 2009. The combination of high margins and questions about the quality of care have led to questions about SNF payment levels.

MedPAC will make its final recommendations when it formally adopts its report to Congress at a later meeting.