Over the next 30 years, the Medicare program will account for nearly 80 percent of the increase in health care spending. This growth will continue to put pressure on the already dire situation facing the Hospital Insurance (HI) Trust Fund, which is expected to be bankrupt in 2028. Because of these looming fiscal issues, policy makers must be hypervigilant about the services paid out of the HI Trust Fund, including skilled nursing facility (SNF) and home health agency (HHA) services. Long criticized by the Medicare Payment Advisory Commission for driving profits over patients, SNFs had a marginal Medicare profit of 25 percent in 2020 and HHAs had a 23 percent profit. To address these issues the Centers for Medicare and Medicaid Services (CMS) recently embarked in comprehensive payment reform.
Goals Of Payment Reform
CMS contracted with Acumen, LLC for SNF reform and Abt Associates for HHA reform. The goal in both cases was to develop an alternative case-mix adjustment methodology, in which Medicare payments would be adjusted based on the patient characteristics. This work led to development of the Patient Driven Payment Model (PDPM) for SNFs and the Home Health Groupings Model (HHGM) for HHAs, which purposefully intended to shift reimbursement away from reliance on therapy volume.
In addition to the focus on patient characteristics, CMS also aimed for implementation in both payment reforms to be budget neutral, meaning actual expenditures would be no higher or lower than predicted expenditures in any given year, with no excess draws on the Trust Funds. When CMS proposed implementation of PDPM, it did not assume any change in provider behavior under the new payment system. However, when CMS proposed implementation of HHGM, it assumed provider behavior would change in three ways:
- Increased clinical group coding, in which primary diagnosis codes drive episode group assignments that trigger higher payments;
- Additional comorbidity coding, in which secondary diagnosis codes drive higher payments; and
- Overuse of short visit episodes because the total number of episodes is expected to increase due to the change from a 60-day to 30-day episode of care.
CMS estimated that these three behavioral changes would lead to overpayments (non-budget neutral effect) and therefore proposed a 4.3 percent cut to future HHA payments. Not surprisingly the respective industries responded differently to these proposals. After the 2020 proposals, the SNF trade association supported PDPM and the home health trade association opposed HHGM. In response to comments, CMS finalized PDPM but did not finalize HHGM. This initial divergence set SNF and HHA payment reform on fundamentally different paths.
Precedent-Setting Statutory Language
Three months after CMS chose not to finalize HHGM, Congress required its implementation. Congress codified CMS’s previous proposal to change home health services from a 60-day to 30-day episode of care. The policy also required CMS to make assumptions about behavior changes that could occur under the new payment system. CMS is required to assess such changes from 2020 through 2026. After such assessment, CMS is required to make one or more permanent prospective increases or decreases to correct for any expenditures (higher or lower) that are different than what is expected.
It is common for CMS to make one permanent prospective adjustment with payment reform, not multiple adjustments. Some examples of past prospective reductions include the Medicare-Severity Diagnosis Related Groupings (MS-DRGs) for inpatient hospitals (2008), Resource Utilization Groupings version three (RUG-III) for SNF (2012), PDPM for SNF (2023–24), and the Patient Driven Groupings Model (PDGM), the new name for HHGM that CMS adopted after the congressional mandate (2020).
The 2020 behavioral adjustment for HHA’s PDGM was only the first reduction CMS pursued. CMS is currently exercising its authority to apply “one or more” prospective adjustments (exhibit 1) with a proposal for a second prospective reduction of 7.69 percent to begin in 2023.
Exhibit 1: Comparison of SNF and HHA Medicare payment reforms—estimated excess trust fund draws
Sources: Percentages were reported in the skilled nursing facility and home health agency regulations, and dollar amounts were derived by multiplying the total annual Medicare payments calculated in the authors’ analysis of the Standard Analytical Files for skilled nursing facilities (FY2020 = $26.00 billion, FY2021 = $25.61 billion) and home health agencies (CY2020 = $17.12 billion, CY2021 = $16.04 billion). 2022 and 2023 payments were derived by multiplying the 2021 amounts by the standard payment update factors such as market basket and productivity adjustments, and for HHA, CMS’s estimated effects of updating fixed-dollar loss ratios and rural add-on percentages, as reported in respective regulations. Retrospective recoupment totals were calculated by multiplying the annual payment totals by the prospective adjustment percentages. CY = calendar year; FY = fiscal year.
Beyond the prospective adjustment, Congress also afforded CMS the authority to apply a retrospective recoupment under PDGM. This is an important distinction from the prospective adjustment—the retrospective authority allows CMS to go back to the beginning of PDGM implementation and apply an additional adjustment that is necessary to account for behavioral changes. In the instance of PDGM, CMS is required to apply the additional 7.69 percent reduction to 2020 through 2022 (exhibit 1). Per the statutory requirement, CMS must apply the retrospective recoupment on a temporary basis, until the total amount (~$3.2 billion) of overpayment is collected. CMS’s authority to pursue the PDGM retrospective recoupment is precedent setting, as it is the only instance of such authority in title 18 of the Social Security Act (SSA). Although not included in the SSA, Congress previously required (2012) an $11 billion retrospective reduction of inpatient hospital payment with the transition to MS-DRGs.
Lack Of Retrospective Authority For SNFs
Like PDGM, CMS eventually applied a prospective reduction to SNFs for PDPM. Also, like PDGM, the PDPM prospective reduction did not address the entirety of overpayments for the first three years of implementation. In the same way CMS intends to apply the 7.69 percent reduction to HHA payments, CMS should also apply an annual 4.6 percent reduction to SNF payments for 2020 through 2023 (Table 1). However, CMS does not have the statutory authority to apply a retrospective reduction to SNF payments. Such authority would require an act of Congress.
There are several reasons why Congress should consider giving CMS the authority to retrospectively recoup the PDPM overpayment to SNFs. First, CMS’s stated intention of achieving budget neutrality has not been met, resulting in an estimated $4.0 billion (exhibit 1) that has been overpaid. Second, as noted above, the HI Trust Fund will be bankrupt in 2028, and SNFs are reimbursed from the HI Trust Fund.
Finally, SNFs and HHAs are often viewed as competitors in the Medicare program. Applying the retrospective reduction to only HHAs and not to SNFs puts SNFs in a more advantageous financial status than HHAs, thus undermining competition on the basis of quality and outcomes. Furthermore, the differential treatment could signal to patients, markets, and others that there is a preference for one setting above another.
Summing Up
CMS’s pursuit of payment reform for both SNF and HHA is a positive step that addresses long-standing criticisms of the Medicare program. Given the stated goal of implementing payment reform in a budget neutral manner, Congress should pursue parity across payment systems by giving CMS retrospective recoupment authority in both the SNF and HHA payment systems. As both Congress and CMS consider future payment reforms in the Medicare program, Congress should consider proactively affording CMS the ability to retrospectively recoup payments to ensure budget neutrality in each of its payment systems. Furthermore, CMS must also do its part to equally apply prospective payment adjustments in context of payment reforms. Such actions would ensure competition occurs based on quality and outcomes, rather than arbitrary application of payment adjustments.
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A Tale Of Two Payment Reforms - healthaffairs.org
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