What is ahead for hospitals based on the December MedPAC meeting?

MedPAC is the nonpartisan advisory group that provides advice to Congress (and CMS).  Although not mandatory, MedPAC recommendations are taken seriously and may be implemented by CMS through regulation or Congress through legislation. Thus, policy watchers pay attention to MedPAC meeting materials as a harbinger of future program evolution. The meeting reports are used by the MedPAC Chairman for the agency’s semi-annual report to Congress. 

The December MedPAC meeting included a report on acute care hospitals and a recommendation for hospital quality programs. First, I’ll summarize the hospital findings and then the value-based program recommendations.

Hospital findings:

I’d say the hospital findings have some sobering news for hospitals because MedPAC’s advice is for Congress to maintain financial pressure on hospitals to prevent spiraling costs.

Detailed findings:

• Beneficiary Access = Good
• Outpatient Spending = driven primarily by Part B drugs (ex. chemo, transfusion drugs)
• 2017 saw fewer hospital closures than 2013 and there were more urban than rural closures in 2017
• Occupancy rates remain low, up slightly since 2013
  • Overall 62.5%
  • Rural 40.2%
• Average marginal Medicare profit = 8% in 2017, thus “hospitals have financial incentive to serve Medicare beneficiaries”
• Access to Capital = strong
• Profitability
  • All-payer margins = 7.1% in 2017 (up from 6.4% in 2016)
  • And operating margins and cashflow measures increased (2016 to 2017)
• Quality of care = improved

For operating margins, MedPAC concluded that:

• Aggregate margins = -9.9%
• Efficient provider margins = -2%

Overall margins vary by hospital type with nonprofits faring the best. And, teaching hospitals have higher margins than non-teaching and, surprising to me, urban hospitals lag behind rural hospitals:

• 2017 Hospital Margins:
  • All hospitals = -9.9%
  • =========================
  • Urban = -10%
  • Rural (excluding CAHs) = -8.2%
  • Rural (including CAHs) = -5.9%
  • =========================
  • Major teaching = -9.0%
  • Other teaching = -8.2%
  • Non-teaching = -12.2%
  • =====================
  • Nonprofit = -11%
  • For profit = -2.6%

Then MedPAC went a level deeper and compared relatively efficient hospitals with other hospitals. Median margin:

• Relatively efficient hospitals (with lower mortality and readmissions) = -2%
• Other hospitals = -9%

MedPAC recommendations for its Chairman’s report to Congress include:

• Maintain a level of financial pressure on hospitals to control cost growth,
• Minimize differential in payment rates between sites of care,
• Reward high performing hospitals, and
• Move Medicare payments toward the cost of efficiently providing high quality care.

Inpatient value-based program findings:

I’d say the hospital value-based program findings have quite positive implications for hospitals if Congress and CMS adopt the recommendations. MedPAC’s advice is for Congress to consolidate three overlapping hospital quality programs and eliminate one of them. (See slide 5 of the summary).

This is an idea that has been circulating for a while and makes good sense. If the AHA and the AMA support it, it seems likely that CMS will adopt this approach, simplifying hospital quality reporting.

Gretchen Mills is manager of market strategy for populations and payment solutions at 3M Health Information Systems.