MedPAC financing recommendations for rural hospitals should be extended to all

Nov. 16, 2015 / By Richard Fuller, MS, Norbert Goldfield, MD

In the MedPAC October meeting, the commission returned to the seemingly intractable problem of equalizing access to health care for rural communities. Medicare payment offers three sources of support within the inpatient prospective payment system (IPPS) for rural hospitals—through designation as a Medicare-dependent hospital, a sole-community hospital or qualification for a low-volume adjustment. A fourth avenue of support is exempting a hospital from IPPS and allowing it operate as a Critical Access Hospital (CAH).

Each of these policy options, while providing support, fail to address the core cause of hospital financial duress. That is, payment policies to support hospital mission are tied to inpatient volume and inpatient admissions are declining. Moreover, CMS value-based purchasing policies are intended to further reduce inpatient volumes. Policymakers have not structured current hospital mission support to reward efficiency. In fact, policymakers exempt CAHs from measures and penalties placed upon IPPS facilities to promote quality. In response to the reality of declining admissions and the need to extract greater value from Medicare spending, MedPAC staff advocate for alternative models to support struggling hospitals by repurposing them as outpatient facilities providing urgent and emergent care (including community based clinic services), aligning them with community needs.

MedPAC staff recommendations represent a thoughtful policy response to the situation facing rural health networks, but fail to address the wider policy issue. Declining inpatient admissions are not just an issue for rural communities, but a trend affecting all hospitals regardless of location. Similarly, Medicare payment policies are focused upon reducing inpatient volume and service utilization in all facilities. In contrast to the policy objective of fewer admissions, mission-related support for beneficial costs is primarily provided through Indirect Medical Education (IME) and Disproportionate Share (DSH) payments which are in turn made in proportion to case-mix adjusted inpatient volume.

As we have highlighted in previous blogs, the cost of the uninsured, the preservation of standby capacity, and additional costs borne through inefficiency in the training of future physicians are rationales for provision of the IME and DSH payments made by the Medicare program. As with the current model of financial support to preserve healthcare access for rural communities, these dollars are tied to inpatient services both directly through the IPPS payment algorithm and indirectly as the benchmark that Medicare provides for other, particularly commercial, payers to follow. Basing the funding of these public goods upon inpatient volume is unstable—at a time when inpatient volumes are under pressure—and inequitable. Inequality of funding results from both the share of community benefit paid for by individuals that use the facility (at a time where the proportion of personal liability for services is increasing), and the actions of managed care organizations in diverting their enrollees from facilities that are higher cost due to the level of community benefit they provide. Moreover, by embedding costs for community benefit in the transaction price (DRG payment) no one knows what we are buying with our support dollars. There is a distinct lack of transparency in how supplemental dollars translate into community benefit.

A central plank of this salutary MedPAC proposal for rural hospitals is the provision of fixed grant funding in support of clearly defined services. We advocate extending this approach to the full array of supplemental payments including DSH and IME. Under this scenario, policymakers would need to precisely define the objective (e.g., standby capacity, physician training or support for the uninsured) of any supplemental payments. Policymakers should base the amount of support on the benefit generated rather than through the existing system of proxy by inpatient case-mix adjusted volume.

As importantly, such support should not be borne and determined by a single payer such as Medicare. Individuals and plans should also contribute to community benefits. Financing should ensure equity in paying for mission-related costs across the broad base of health system utilizers—both those using services now and those in the community that will use services in the future. However, we should all have input into how much we wish to invest in those benefits, know (transparently) what those benefits are, and have them delivered efficiently. That’s our recommendation to address the growing issues around the existing health system payment policy that relies too heavily on inpatient volume.

Richard Fuller, MS, is an economist with 3M Clinical and Economic Research.

Norbert Goldfield, MD, is medical director for 3M Clinical and Economic Research.

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