MedPAC proposes cure for what’s ailing hospital payment policies

According to Mark Miller, Executive Director of the Medicare Payment Advisory Commission (MedPAC), as a result of health care reform and changing trends in care settings, several areas of the fee-for-service (FFS) hospital payment policies need to be improved to ensure that payments are accurate. Miller provided testimony before the House of Representatives Committee on Ways and Means that summarized the MedPAC’s findings relating to hospital payment trends and its recommendations for improving the accuracy of FFS payment rates.


Inpatient discharges for Medicare patients declined 4.4 percent between 2012 and 2013. Notably, the use of outpatient services increased 33 percent for Medicare FFS Part B beneficiaries over the past seven years, which according to MedPAC, represents an increasing trend in providing care in outpatient settings. It also reflects the increasing number of hospitals that are purchasing and converting freestanding physician practices into hospital outpatient departments (HOPDs). This has resulted in a market shift away from freestanding practices and higher Medicare spending because the program pays higher rates in such settings than in freestanding offices.

Payment adequacy

Private insurers pay at higher rates, which allow hospitals to have higher costs that make Medicare payments appear inadequate. Hospital consolidation has allowed hospitals to gain a greater market power than private insurers. Therefore, hospitals do not receive pressure from private insurers to contain their costs.

Recommended payment changes

MedPAC recommended a number of changes to hospital payment policies, including outpatient rates should be equal or made closer to physician office rates for similar set of services. Similarly, standard payment rates for long-term care hospitals (LTCHs) should be paid only for patients who are truly chronically, critically ill (CCI). Services provided to LTCH patients who are not CCI should be paid based on inpatient prospective payment system (IPPS) rates.

IME and DSH payments

MedPAC has determined that only 40 to 45 percent of indirect medical education (IME) payments can be justified as covering the higher costs of Medicare inpatient care, which leaves $3.5 billion paid to teaching hospitals with little accountability.

Additionally, the disproportionate share hospital (DSH) payment policy does not relate to the cost of treating low-income patients. Section 2551 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) revised the DSH system by requiring that Medicare payments be divided between one pool for traditional DSH and another pool for non-Medicare uncompensated care costs. While MedPAC has raised concerns about how the uncompensated payments are allocated, the amount of such payments will decline as the uninsured rate decreases.


According to MedPAC, the graduate medical education (GME) system is not aligned with delivery system reforms. Medicare payments for GME should be decoupled from the inpatient FFS payment system and GME resources should be devoted solely to programs that meet high educational standards. Medicare payments to teaching hospitals should be more transparent, and there should be studies of workforce needs, specialty residency programs, and medical school diversity.

Readmissions penalty

MedPAC recommends that the hospital readmissions penalty established by Section 3025 of the ACA should be continued, but recommends expanding the penalty to cover certain post-acute care providers. It recommended setting a fixed target for readmission rates and the readmission rates of hospitals that treat a large share of low-income patients should be compared based on peers serving a similar amount of Medicare beneficiaries.

Two-Midnight Rule

In response to the highly controversial, “Two-Midnight Rule,” MedPAC recommended that Recovery Audit Contractor (RAC) audits be focused on hospitals with the highest inpatient stay rates. The RAC contingency fees should be adjusted to make them more accountable for claims denials, and the RAC look-back period and rebilling window should be better aligned. MedPAC recommended withdrawing the Two-Midnight Rule completely because it will eliminate RAC oversight of a large number of inpatient claims.

Eliminate beneficiary liability

In order to address issues of beneficiary liability for short hospital stays, legislators should revise the three-inpatient-day hospital eligibility requirements for SNF care coverage so as to allow up to two outpatient observation days to count toward the requirement. Acute care hospitals should also be required to timely notify beneficiaries that they are in observation status and that it may affect their financial responsibility.

Lastly, MedPAC suggested that Medicare should create severity diagnosis-related groups that are specifically designed for one-day hospital stays. Alternatively, Medicare could adopt a site neutral payment policy that makes payments equal for similar short inpatient and outpatient stays.